FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
þ Annual
Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2008
OR
o
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
to
Commission File Number: 1-12162
BorgWarner Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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13-3404508
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State or other jurisdiction of
Incorporation or organization
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(I.R.S. Employer Identification
No.)
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3850 Hamlin Road,
Auburn Hills, Michigan 48326
(Address of principal executive
offices) (Zip Code)
Registrants telephone
number, including area code:
(248) 754-9200
Securities registered pursuant to
Section 12(b) of the Act:
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Name of each exchange on
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Title of each class
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which registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
The aggregate market value of the voting common stock of the
registrant held by stockholders (not including voting common
stock held by directors and executive officers of the
registrant) on June 30, 2008 (the last business day of the
most recently completed second fiscal quarter) was approximately
$5.2 billion. As of February 6, 2009, the registrant
had 115,532,736 shares of voting common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by
reference into the Part of the
Form 10-K
indicated.
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Part of Form 10-K
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into which
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Document
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incorporated
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BorgWarner Inc. Proxy Statement for the 2009 Annual Meeting of
Stockholders
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Part III
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BORGWARNER
INC.
FORM 10-K
YEAR
ENDED DECEMBER 31, 2008
INDEX
2
CAUTIONARY
STATEMENTS FOR FORWARD-LOOKING INFORMATION
Statements contained in this
Form 10-K
(including Managements Discussion and Analysis of
Financial Condition and Results of Operations) may contain
forward-looking statements as contemplated by the 1995 Private
Securities Litigation Reform Act that are based on
managements current outlook, expectations, estimates and
projections. Words such as outlook,
expects, anticipates,
intends, plans, believes,
estimates, variations of such words and similar
expressions are intended to identify such forward-looking
statements. Forward-looking statements are subject to risks and
uncertainties, many of which are difficult to predict and
generally beyond our control, that could cause actual results to
differ materially from those expressed, projected or implied in
or by the forward-looking statements. Such risks and
uncertainties include: fluctuations in domestic or foreign
vehicle production, the continued use of outside suppliers,
fluctuations in demand for vehicles containing our products,
changes in general economic conditions, as well as the other
risks noted under Risk Factors. We do not undertake
any obligation to update any forward-looking statements.
3
PART I
BorgWarner Inc. and Consolidated Subsidiaries (the
Company) is a Delaware corporation that was
incorporated in 1987. We are a leading, global supplier of
highly engineered automotive systems and components, primarily
for powertrain applications. Our products help improve vehicle
performance, fuel efficiency, stability and air quality. These
products are manufactured and sold worldwide, primarily to
original equipment manufacturers (OEMs) of
light-vehicles (passenger cars, sport-utility vehicles, vans and
light-trucks). The Companys products are also sold to
other OEMs of commercial trucks, buses and agricultural and
off-highway vehicles. We also manufacture and sell our products
to certain Tier One vehicle systems suppliers and into the
aftermarket for light and commercial vehicles. The Company
operates manufacturing facilities serving customers in the
Americas, Europe and Asia, and is an original equipment supplier
to every major automotive OEM in the world.
Financial
Information About Segments
Refer to Note 21, Reporting Segments and Related
Information of the Notes to the Consolidated Financial
Statements in Item 8 of this report for financial
information about business segments.
Narrative
Description of Reporting Segments
The Company reports its results under two reporting segments:
Engine and Drivetrain. Net revenues by segment for the three
years ended December 31, 2008, 2007 and 2006 are as follows
(in millions of dollars):
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Year Ended December 31,
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Net Sales
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2008
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2007
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2006
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Millions of dollars
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Engine
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$
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3,861.5
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$
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3,761.3
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$
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3,154.9
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Drivetrain
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1,426.4
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1,598.8
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1,461.4
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Inter-segment eliminations
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(24.0
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(31.5
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(30.9
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Net sales
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$
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5,263.9
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$
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5,328.6
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$
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4,585.4
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The sales information presented above excludes the sales by the
Companys unconsolidated joint ventures (See Joint
Ventures section). Such sales totaled approximately
$792 million in 2008, $720 million in 2007 and
$676 million in 2006.
Engine
The Engine Group develops products to manage engines for fuel
efficiency, reduced emissions, and enhanced performance. Concern
about fuel prices and availability, and the need to lower
CO2
emissions are driving demand for the Companys products in
smaller, more efficient gasoline and diesel engines and
alternative powertrains in hybrid vehicles. Engine Group
products currently fall into the following major categories:
turbochargers, chain products, emissions systems, thermal
systems, diesel cold start and gasoline ignition technology and
diesel cabin heaters.
The Engine Group provides turbochargers for light-vehicle,
commercial-vehicle and off-road applications for diesel and
gasoline engine manufacturers in Europe, North America, South
America and Asia. The Engine Group has greatly benefited from
the growth in turbocharger demand in Europe. This growth is
linked to increasing demand for diesel engines in light vehicles
which typically use turbochargers and for turbocharged gasoline
engines. Benefits of turbochargers in both light-vehicle and
commercial-vehicle applications include increased power for a
given engine size, improved fuel economy and significantly
reduced emissions.
Sales of turbochargers for light-vehicles represented
approximately 24%, 21%, and 18% of the Companys total
revenues for 2008, 2007 and 2006, respectively. The Company
currently supplies light-vehicle turbochargers to many OEMs
including VW/Audi, Renault, PSA, Daimler, Hyundai, Fiat and BMW.
The Company also supplies commercial-vehicle turbochargers to
Caterpillar, John Deere, Daimler, International, Deutz and MAN.
4
The Companys newest technologies are its regulated
two-stage turbocharging system known as
R2S®,
variable turbine geometry (VTG) turbochargers and
turbochargers for gasoline direct injected engines. In 2006, the
Company launched a high temperature VTG turbocharger for a
Porsche 3.6 liter gasoline application, an R2S application for a
Daimler light-truck called the Sprinter and VTG turbochargers
for the Hyundai
A-engine
family. In 2007, the Company began supplying its R2S
turbocharger technology combined with variable turbine geometry
to International Engine Groups PowerStroke 6.4-liter V8
diesel engine used in Fords F-Series heavy-duty pickup
trucks. In 2008, the Company announced the start of production
of its award winning R2S technology for Daimlers new 4
cylinder diesel engine range. The Company also began shipping
VTG turbochargers for VWs new common-rail engine range and
announced the launch of a VTG turbocharger for use with
low-pressure exhaust gas recirculation to reduce emissions on
VWs Jetta Clean Diesel TDI.
The Engine Group also designs and manufactures products to
control emissions and improve fuel economy. These products
include electric air pumps, turbo actuators that use integrated
electronics to precisely control turbocharger speed and pressure
ratio, and exhaust gas recirculation valves for gasoline and
diesel applications. The Engine Group also manufactures a wide
variety of fluid pumps, including engine oil pumps for engine
and transmission lubrication, and products for engine air intake
management.
The Engine Groups chain and chain systems products include
timing chain and timing drive systems, variable cam timing
(VCT) systems, crankshaft and camshaft sprockets,
tensioners, guides and snubbers,
HY-VO®
front-wheel drive (FWD) transmission chain and
four-wheel drive (4WD) chain, and MORSE
GEMINI®
chain systems for light-vehicle and commercial-vehicle
applications.
The Companys timing chain systems are used in Fords
family of overhead cam engines, including the Duratec and
Modular, and in-line 4 cylinder engines, as well as on
Chryslers 2.7 liter, 3.7 liter and 4.7 liter, overhead cam
engines, as well as the 4 cylinder World Engine family of
engines. In addition, the Company provides timing systems to a
number of Asian OEMs and their North American transplant
operations, including Honda, Nissan, and Hyundai, and to several
European OEMs. The Company believes that it is the worlds
leading manufacturer of timing chain systems.
The Engine Group has successfully launched its latest VCT
product; Cam Torque
Actuatedtm
(CTA) VCT. VCT is a means of precisely controlling
the flow of air into and out of an engine by allowing the
camshaft to be dynamically phased relative to its crankshaft.
The Companys CTA technology utilizes camshaft torque as
its main actuation energy, instead of the conventional
oil-pressure actuated approach. The CTA system has been launched
on Fords 3.0 liter Duratec engine featured in the Ford
Escape, Ford Fusion, Mazda 6, and Mercury Mariner.
The Company believes it is the worlds leading manufacturer
of chain for FWD transmissions and 4WD transfer cases. HY-VO
chain is used to transfer power from the engine to the
drivetrain. The Companys MORSE GEMINI transmission chain
system emits significantly less chain pitch frequency noise than
conventional transmission chain systems. The chain in a transfer
case distributes power between a vehicles front and rear
output shafts which, in turn, provide torque to the front and
rear wheels.
The Engine Group believes it is a leading global provider of
engine thermal solutions for truck, agricultural and off-highway
applications. The group designs, manufactures and markets
viscous fan drives that control fans to sense and respond to
multiple cooling requirements. The Engine Group also
manufactures and markets polymer fans for engine cooling
systems. The Companys thermal products provide improved
vehicle fuel economy and reduced engine emissions while
minimizing parasitic horsepower loss. The Company has been
awarded the standard position (the OEM-designated
preferred supplier of component systems available to the
end-customer) at the major global heavy truck producers.
In 2005, the Company acquired approximately 69.4% of the
outstanding shares of BERU Aktiengesellschaft
(BERU), headquartered in Ludwigsburg, Germany. In
2007, the Company increased its ownership to approximately
82.2%. In the second quarter of 2008, the Company and BERU
completed a Domination and Profit Transfer Agreement
(DPTA), giving BorgWarner full control of BERU.
Refer to Note 20, Recent Transactions of the
Notes to the Consolidated Financial Statements in Item 8 of
this report for further information related to the
Companys DPTA agreement with BERU.
5
As a result of the tendering of shares in 2008 in accordance
with the DPTA, the Company owns approximately 96% of all
BERUs outstanding shares. On January 7, 2009, the
Company informed BERU of its intention to purchase the remaining
outstanding shares of approximately 4%, using the required
German legal process referred to as a
squeeze-out
to complete the 100% ownership.
BERUs operating results are included within the
Companys Engine Group segment. BERU is a leading global
automotive supplier of diesel cold starting technology (glow
plugs and instant starting systems); gasoline ignition
technology (spark plugs and ignition coils); and electronic
control units and sensor technology (tire pressure sensors,
diesel cabin heaters and selected sensors). In 2008, BERU
launched its new Pressure Sensor Glow Plug with which the
combustion processes of a diesel engine allowing the lowest
CO2
and
NOx
emissions possible.
Drivetrain
The Drivetrain Group leverages the Companys expertise in
clutching and control systems to enable efficient transmission
of engine torque through the vehicle drivetrain and management
of torque distribution to the driven wheels. The Companys
technology can improve fuel efficiency and help reduce emissions
in all types of powertrains. The Drivetrain Groups major
products are transmission components and systems, and AWD torque
management systems.
The Drivetrain Group designs and manufactures automatic
transmission components and modules and is a supplier to
virtually every major automatic transmission manufacturer in the
world for both conventional automatic and new dual-clutch
transmissions (DCT).
Shift quality products are provided in four
principal categories. DCT products include dual-clutch modules,
torsional vibration dampers and mechatronic control modules.
Friction products include friction plates, transmission bands,
torque converter clutches, and friction clutch modules.
One-way clutches and torsional vibration dampers are mechanical
products. The controls products line features electro-hydraulic
solenoids, solenoid modules and high pressure solenoids for
automated manual transmissions (AMTs).
The Companys 50%-owned joint venture in Japan, NSK-Warner
Kabushiki Kaisha (NSK-Warner), is a leading producer
of friction plates and one-way clutches in Japan. NSK-Warner is
also the joint venture partner with a 40% interest in the
Drivetrain Groups Korean subsidiary, BorgWarner
Transmission Systems Korea, Inc.
The Company has led the globalization of todays DCT
technology for over ten years. Following the development of its
DCT technology in the 1990s, the Company established its
industry-leading position in Europe in 2003 with the production
launch of its award-winning
DualTronic®
innovations with VW/Audi. In 2006, the Company was awarded the
first dual-clutch program in China with SAIC. In 2007, the
Company launched its first dual-clutch technology application in
a Japanese transmission with Nissan.
The Company has announced programs with customers that include
VW, Audi, Bugatti, SAIC and Nissan, in addition to Getrag DCT
programs with five additional global automakers. Also, the
Company is working on over 20 programs with OEMs around the
world. BorgWarner DualTronic technology provides both better
fuel-efficiency and a great driving experience, enabling a
conventional, manual gearbox to function as a fully automatic
transmission by eliminating the interruption in power flow that
occurs when a single clutch manual transmission shifts gears.
In conventional automatic transmissions, there has been a global
market trend from four and five speeds to six, seven, and even
eight speed transmissions. Transmissions with more speeds
improve fuel economy and vehicle performance and offer growth
opportunities.
In 2006 the Drivetrain Group acquired the high-pressure solenoid
product lines of Eaton Corporation. Among these solenoids are
those used in AMTs. AMTs are a growing niche of the entry-level
city-car and light commercial-vehicle segments in Europe and
some Asian markets. High pressure control systems are also
serving a growing share of the DCT market segment.
6
The Drivetrain Groups torque management products include
rear-wheel drive (RWD)/all-wheel drive
(AWD) transfer case systems, FWD/AWD electromagnetic
coupling systems and advanced products. The Companys focus
is on electronically controlled (active) torque management
devices and systems for their vehicle dynamics, fuel economy and
stability benefits. Additional torque management products
include synchronizer rings and systems for application in
manual, automated manual and DCT.
Transfer cases are installed primarily on light-trucks,
sport-utility vehicles (SUVs), rear-wheel drive
based cross-over utility vehicles (CUVs) and
passenger cars. A transfer case attaches to the transmission and
distributes torque to the front and rear axles improving vehicle
traction and stability in dynamic driving conditions. Sales of
rear-wheel drive based transfer cases and components have
declined to approximately 7%, 9% and 10% of the Companys
total revenues for 2008, 2007 and 2006, respectively.
The Company is involved in the FWD/AWD market with
electromagnetic couplings that use electronically controlled
clutches to distribute power to the rear wheels instantly as
traction is required.
NexTrac®
is our latest product innovation that produces outstanding
stability and traction while promoting better fuel economy.
NexTrac launched in 2008 on the Hyundai Santa Fe, Tucson
and KIA Sportage.
With the trend toward vehicle electrification gaining momentum,
the Company is also applying its years of expertise to deliver
robust and highly efficient single and multiple speed electric
gear reduction solutions for hybrids and electric vehicles.
Joint
Ventures
As of December 31, 2008, the Company had 10 joint ventures
in which it had a less-than-100% ownership interest. Results
from the six ventures in which the Company is the majority owner
are consolidated as part of the Companys results. Results
from the four ventures in which the Companys effective
ownership interest is 50% or less, were reported by the Company
using the equity method of accounting.
Management of the unconsolidated joint ventures is shared with
the Companys respective joint venture partners. Certain
information concerning the Companys joint ventures is set
forth below:
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Percentage
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Owned by
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Location
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Fiscal 2008
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Year
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the
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of
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Sales ($ in
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Joint Venture
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Products
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Organized
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Company (a)
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Operation
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Joint Venture Partner
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millions) (b)
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Unconsolidated:
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NSK-Warner K.K.
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Transmission components
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1964
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50
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%
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Japan
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NSK Ltd.
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$
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637.9
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Turbo Energy Limited(c)
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Turbochargers
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1987
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32.6
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India
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Sundaram Finance Limited; Brakes India Limited
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$
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128.1
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BERU Diesel Start Systems Pvt. Ltd.
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Glow Plugs
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1996
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49
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%
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India
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Jayant Dave
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$
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4.5
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BERU-Eichenauer
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Sub-systems for diesel cabin heaters
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2000
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50
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%
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Germany
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Fritz Eichenauer GmbH & Co. KG
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$
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21.3
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Consolidated:
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BorgWarner Transmission Systems Korea, Inc.
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Transmission components
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1987
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60
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%(d)
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Korea
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NSK-Warner K.K.
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$
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108.8
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Divgi-Warner Pvt. Ltd.
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Transfer cases and automatic locking hubs
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1995
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60
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%
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India
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Divgi Metalwares, Ltd.
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$
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18.5
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Borg-Warner Shenglong (Ningbo) Co. Ltd.
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Fans and fan drives
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1999
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70
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%
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China
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Ningbo Shenglong Group Co., Ltd.
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$
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28.9
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BorgWarner TorqTransfer Systems Beijing Co. Ltd.
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Transfer cases
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2000
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80
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%
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China
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Beijing Automotive Industry Corporation
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$
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40.8
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SeohanWarner Turbo Systems Ltd.
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Turbochargers
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2003
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71
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%
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Korea
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Korea Flange Company
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$
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45.7
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BERU Korea Co. Ltd.
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Ignition coils and pumps
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2001
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51
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%
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Korea
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Mr. K.B. Mo and Mr. D.H. Kim
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$
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34.2
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7
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(a) |
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In the second quarter of 2008, the Company and BERU AG
(BERU) completed a Domination and Profit Transfer
Agreement (DPTA), giving BorgWarner full control of
BERU. For the joint ventures in which BERU is a party, the
percentage of ownership for each joint venture reflects
BERUs ownership percentage. |
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(b) |
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All sales figures are for the year ended December 31, 2008,
except NSK-Warner and Turbo Energy Limited. NSK-Warners
sales are reported for the 12 months ended
November 30, 2008. Turbo Energy Limiteds sales are
reported for the 12 months ended September 30, 2008 |
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(c) |
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The Company made purchases from Turbo Energy Limited totaling
$25.4 million, $25.1 million and $18.7 million
for the years ended December 31, 2008, 2007, and 2006,
respectively. |
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(d) |
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BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest
in BorgWarner Transmission Systems Korea, Inc. This gives the
Company an additional indirect effective ownership percentage of
20%. This results in a total effective ownership interest of 80%. |
Financial
Information About Geographic Areas
Refer to Note 21, Reporting Segments and Related
Information of the Notes to the Consolidated Financial
Statements in Item 8 of this report for financial
information about geographic areas.
Approximately 72% of the Companys consolidated sales for
2008 were outside the United States, including exports. However,
a portion of such sales was to OEMs headquartered outside the
United States that produce vehicles that are, in turn, exported
to the United States.
Customers
Approximately 72% of the Companys total sales in 2008 were
for light-vehicle applications, with the remaining 28% of the
Companys sales to a diversified group of commercial truck,
bus, construction and agricultural vehicle manufacturers, and to
distributors of aftermarket replacement parts.
For the most recent three-year period, the Companys
worldwide sales to the following customers were approximately as
follows:
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Customer
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2008
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2007
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2006
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Volkswagen
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19
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%
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15
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%
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13
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%
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Ford
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9
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%
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12
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%
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13
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%
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Daimler
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6
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%
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6
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%
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11
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%
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Daimler divested Chrysler in 2007. No other single customer
accounted for more than 10% of our consolidated sales in any
year of the periods presented.
The Companys automotive products are generally sold
directly to OEMs substantially pursuant to negotiated annual
contracts, long-term supply agreements or terms and conditions
as may be modified by the parties. Deliveries are subject to
periodic authorizations based upon the production schedules of
the OEMs. The Company typically ships its products directly from
its plants to the OEMs.
Sales and
Marketing
Each of the Companys business units within its two
reporting segments has its own sales function. Account
executives for each of our business units are assigned to serve
specific OEM customers for one or more of a business units
products. Our account executives spend the majority of their
time in direct contact with OEM purchasing and engineering
employees and are responsible for servicing existing business
and for identifying and obtaining new business. Because of their
close relationship with OEMs, account executives are able to
identify and meet customers needs based upon their
knowledge of our customers needs and our products and
design and manufacturing capabilities. Upon securing a new
order, account executives participate in product launch team
activities and serve as a key interface with the customers.
8
In addition, the sales and marketing employees of our Engine
segment and Drivetrain segment often work together to explore
cross-development opportunities for the business units. The
development of DualTronic, the Companys wet-clutch and
control-system technology for a new-concept automated
transmission, is an example of a successful collaboration.
Seasonality
The Companys business is moderately seasonal because the
Companys largest North American customers typically halt
vehicle production for approximately two weeks in July and one
week in December. Additionally, customers in Europe and Asia
typically shut down vehicle production during portions of July
or August and one week in the fourth quarter. Accordingly, the
Companys third and fourth quarters may reflect those
practices.
Research
and Development
The Company conducts advanced engine and drivetrain research at
the segment level. This advanced engineering function looks to
leverage electronics and the Companys expertise across
product lines to create new engine and drivetrain systems and
modules that can be commercialized. A venture capital fund that
was created by the Company as seed money for new innovation and
collaboration across businesses is managed by this function.
In addition, each of the Companys operating segments has
its own research and development (R&D)
organization. The Company has approximately 800 employees,
including engineers, mechanics and technicians, engaged in
R&D activities at facilities worldwide. The Company also
operates testing facilities such as prototype, measurement and
calibration, life cycle testing and dynamometer laboratories.
By working closely with the OEMs and anticipating their future
product needs, the Companys R&D personnel conceive,
design, develop and manufacture new proprietary automotive
components and systems. R&D personnel also work to improve
current products and production processes. The Company believes
its commitment to R&D will allow it to obtain new orders
from its OEM customers.
The following table presents the Companys gross and net
expenditures on R&D activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Millions of dollars
|
|
|
Gross R&D expenditures
|
|
$
|
273.4
|
|
|
$
|
246.7
|
|
|
$
|
219.5
|
|
Customer reimbursements
|
|
|
(67.7
|
)
|
|
|
(35.9
|
)
|
|
|
(31.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net R&D expenditures
|
|
$
|
205.7
|
|
|
$
|
210.8
|
|
|
$
|
187.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys net R&D expenditures are included in the
selling, general, and administrative expenses of the
Consolidated Statements of Operations. Customer reimbursements
are netted against gross R&D expenditures upon billing of
services performed. The Company has contracts with several
customers at the Companys various R&D locations. No
such contract exceeded $6.0 million in any of the years
presented.
Patents
and Licenses
The Company has approximately 3,800 active domestic and foreign
patents and patent applications pending or under preparation,
and receives royalties from licensing patent rights to others.
While it considers its patents on the whole to be important, the
Company does not consider any single patent, any group of
related patents or any single license essential to its
operations in the aggregate or to the operations of any of the
Companys business groups individually. The expiration of
the patents individually and in the aggregate is not expected to
have a material effect on the Companys financial position
or future operating results. The Company owns numerous
trademarks, some of which are valuable, but none of which are
essential to its business in the aggregate.
The Company owns the BorgWarner and
Borg-Warner Automotive trade names and housemarks,
and variations thereof, which are material to the Companys
business.
9
Competition
The Companys operating segments compete worldwide with a
number of other manufacturers and distributors which produce and
sell similar products. Many of these competitors are larger and
have greater resources than the Company. Price, quality,
delivery, technological innovation, application engineering
development and program launch support are the primary elements
of competition.
The Companys major competitors by product type follow:
|
|
|
Product Type: Engine
|
|
Name of Competitor
|
|
Turbochargers:
|
|
Honeywell
IHI
Mitsubishi Heavy Industries (MHI)
|
VCT:
|
|
Aisin
Denso
Hitachi
|
Chains:
|
|
Iwis
Schaeffler Group
Tsubaki Group
|
Emissions products:
|
|
Bosch
Pierburg
Valeo
|
Thermal products:
|
|
Behr
Horton/Sachs
Usui
|
Diesel cold start technology:
|
|
Bosch
NGK
|
|
|
|
Product Type: Drivetrain
|
|
Name of Competitor
|
|
Torque transfer products:
|
|
GKN Driveline
JTEKT
Magna Powertrain
|
Transmission products:
|
|
Bosch
Denso
Dynax
Schaeffler Group
|
In addition, a number of the Companys major OEM customers
manufacture, for their own use and for others, products which
compete with the Companys products. Although these OEM
customers have indicated that they will continue to rely on
outside suppliers, the OEMs could elect to manufacture products
to meet their own requirements or to compete with the Company.
There can be no assurance that the Companys business will
not be adversely affected by increased competition in the
markets in which it operates.
For many of its products, the Companys competitors include
suppliers in other parts of the world that enjoy economic
advantages such as lower labor costs, lower health care costs
and, in some cases, export subsidies
and/or raw
materials subsidies. Also, see Item 1A. Risk Factors.
Employees
As of December 31, 2008, the Company and its consolidated
subsidiaries had approximately 13,800 salaried and hourly
employees (as compared with approximately 17,700 employees
at December 31, 2007), of which approximately 4,100 were
U.S. employees. Approximately 13% of the Companys
U.S. workforce is unionized. The hourly employees at
certain of our international facilities are also unionized. The
Company believes its present relations with employees to be
satisfactory.
10
Our two domestic collective bargaining agreements are for our
Muncie, Indiana plant and our Ithaca and Cortland, New York
facilities. The Muncie agreement expires on April 24, 2009.
The agreement covering the New York facilities expires in
September 2012.
Raw
Materials
Continuing a trend which began in 2004, several raw materials
used in the Companys products hit record pricing levels in
the second quarter of 2008, including steel, aluminum, copper,
resins and certain alloying elements. This was due to a host of
supply and demand factors.
Despite these challenges, the Company used a variety of tactics
in order to limit the impact of inflationary prices and supply
shortages. The Company formed a global procurement organization
to accelerate: cost reductions, purchases from lower cost
regions, risk mitigation efforts, and collaborative buying
activities. In addition, the Company used long-term contracts,
cost sharing arrangements, design changes, customer buy
programs, and hedging instruments to help control costs. The
Company intends to use similar measures in 2009 and beyond.
Refer to Note 11, Financial Instruments of the
Notes to the Consolidated Financial Statements in Item 8 of
this report for information related to the Companys
hedging activities.
For 2009, the Company believes that its supplies of raw
materials and energy are adequate and available from multiple
sources to support its manufacturing requirements. Manufacturing
operations for each of the Companys operating segments are
dependent upon natural gas, fuel oil, and electricity.
Environmental
Regulation and Proceedings
The Company and certain of its current and former direct and
indirect corporate predecessors, subsidiaries and divisions have
been identified by the United States Environmental Protection
Agency and certain state environmental agencies and private
parties as potentially responsible parties (PRPs) at
various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act
(Superfund) and equivalent state laws and, as such,
may presently be liable for the cost of
clean-up and
other remedial activities at 35 such sites. Responsibility for
clean-up and
other remedial activities at a Superfund site is typically
shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or
in the aggregate, will have a material adverse effect on its
results of operations, financial position, or cash flows.
Generally, this is because either the estimates of the maximum
potential liability at a site are not large or the liability
will be shared with other PRPs, although no assurance can be
given with respect to the ultimate outcome of any such matter.
Based on information available to the Company (which in most
cases includes: an estimate of allocation of liability among
PRPs; the probability that other PRPs, many of whom are large,
solvent public companies, will fully pay the cost apportioned to
them; currently available information from PRPs
and/or
federal or state environmental agencies concerning the scope of
contamination and estimated remediation and consulting costs;
remediation alternatives; and estimated legal fees), the Company
has established an accrual for indicated environmental
liabilities with a balance at December 31, 2008 of
$11.9 million. The Company has accrued amounts that do not
exceed $3.4 million related to any individual site and we
do not believe that the costs related to any of these sites will
have a material adverse effect on the Companys results of
operations, cash flows or financial condition. The Company
expects to pay out substantially all of the amounts accrued for
environmental liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the
Company agreed to indemnify the buyer and Kuhlman Electric for
certain environmental liabilities, then unknown to the Company,
relating to certain operations of Kuhlman Electric that pre-date
the Companys 1999 acquisition of Kuhlman Electric. During
2000, Kuhlman Electric notified the Company that it discovered
potential environmental contamination at its Crystal Springs,
Mississippi plant while undertaking an expansion of the plant.
The Company is continuing to work with the Mississippi
Department of Environmental Quality and Kuhlman Electric to
investigate and remediate to the extent necessary, historical
contamination at the plant and surrounding area. Kuhlman
Electric and others, including the Company, were sued in
numerous related lawsuits, in which multiple claimants alleged
11
personal injury and property damage. In 2005, the Company and
other defendants entered into settlements that resolved
approximately 99% of the then known personal injury and property
damage claims relating to the alleged environmental
contamination. Those settlements involved payments by the
Company of $28.5 million in the second half of 2005 and
$15.7 million in the first quarter of 2006, in exchange
for, among other things, dismissal with prejudice of these
lawsuits.
In December 2007, a lawsuit was filed against Kuhlman Electric
and others, including the Company, on behalf of approximately
209 plaintiffs, alleging personal injury relating to the alleged
environmental contamination. In August 2008, two similar
lawsuits were filed against Kuhlman Electric and others,
including the Company, on behalf of approximately 100 plaintiffs
and 30 plaintiffs, respectively, alleging personal injury
related to the alleged environmental contamination. Given the
early stage of the litigation, the Company cannot make any
predictions as to the outcome, but its current intent is to
vigorously defend against the suits.
Conditional
Asset Retirement Obligations
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143 (FIN 47), which requires the
Company to recognize legal obligations to perform asset
retirements in which the timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. Certain
government regulations require the removal and disposal of
asbestos from an existing facility at the time the facility
undergoes major renovations or is demolished. The liability
exists because the facility will not last forever, but it is
conditional on future renovations (even if there are no
immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government
regulations require the removal or closure of underground
storage tanks (USTs) and above ground storage tanks
(ASTs) when their use ceases, the disposal of
polychlorinated biphenyl (PCB) transformers and
capacitors when their use ceases, and the disposal of used
furnace bricks and liners, and lead-based paint in conjunction
with facility renovations or demolition. The Company currently
has 32 manufacturing locations that have been identified as
containing these items. The fair value to remove and dispose of
this material has been estimated and recorded at
$1.4 million as of December 31, 2008 and
$1.0 million as of December 31, 2007.
Available
Information
Through its Internet website (www.borgwarner.com), the Company
makes available, free of charge, its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
all amendments to those reports, and other filings with the
Securities and Exchange Commission, as soon as reasonably
practicable after they are filed or furnished. The Company also
makes the following documents available on its Internet website:
the Audit Committee Charter; the Compensation Committee Charter;
the Corporate Governance Committee Charter; the Companys
Corporate Governance Guidelines; the Companys Code of
Ethical Conduct; and the Companys Code of Ethics for CEO
and Senior Financial Officers. You may also obtain a copy of any
of the foregoing documents, free of charge, if you submit a
written request to Mary Brevard, Vice President, Investor
Relations, 3850 Hamlin Road, Auburn Hills, Michigan 48326.
12
Executive
Officers of the Registrant
Set forth below are the names, ages, positions and certain other
information concerning the executive officers of the Company as
of February 12, 2009.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position With Company
|
|
Timothy M. Manganello
|
|
|
59
|
|
|
Chairman and Chief Executive Officer
|
Robin J. Adams
|
|
|
55
|
|
|
Executive Vice President, Chief Financial Officer and Chief
Administrative Officer
|
Angela J. DAversa
|
|
|
62
|
|
|
Vice President, Human Resources
|
Daniel CasaSanta
|
|
|
54
|
|
|
Vice President
|
John J. Gasparovic
|
|
|
51
|
|
|
Vice President, General Counsel & Secretary
|
Anthony D. Hensel
|
|
|
50
|
|
|
Vice President and Treasurer
|
Bernd W. Matthes
|
|
|
48
|
|
|
Vice President
|
Jeffrey L. Obermayer
|
|
|
53
|
|
|
Vice President and Controller
|
Thomas Waldhier
|
|
|
46
|
|
|
Vice President
|
Alfred Weber
|
|
|
51
|
|
|
Vice President
|
Roger J. Wood
|
|
|
46
|
|
|
Vice President
|
Mr. Manganello has been Chairman of the Board since June
2003 and Chief Executive Officer of the Company since February
2003. He was also President and Chief Operating Officer from
February 2002 until February 2003. Mr. Manganello is also a
director of Bemis Company, Inc. and he serves as the Board
Chairman of Federal Reserve Bank of Chicago, Detroit branch.
Mr. Adams has been Executive Vice President, Chief
Financial Officer and Chief Administrative Officer since April
2004. He was Executive Vice President Finance and
Chief Financial Officer of American Axle &
Manufacturing Holdings Inc. (American Axle) from
July 1999 until April 2004. Mr. Adams also is a member of
the Supervisory Board of BERU AG.
Mr. CasaSanta has been Vice President of the Company and
President and General Manager of BorgWarner TorqTransfer Systems
Inc. (TTS) since June 2008. He was Vice President
and General Manager of Thermal Systems from January 2003 until
June 2008.
Ms. DAversa has been Vice President, Human Resources
since October 2004. She was Acting Vice President, Human
Resources from April 2004 until September 2004 and Senior
Director, Management and Organization Development from April
2004 until September 2004. She was Director
Management & Organization Development from January
1995 until March 2004.
Mr. Gasparovic has been Vice President, General Counsel and
Secretary of the Company since January 2007. After working
as a private investor from January 2004 until January 2005, he
was Senior Vice President and General Counsel of Federal-Mogul
Corporation from February 2005 until December 2006. From
February 2003 until December 2003, he was Executive Vice
President, General Counsel, Corporate Secretary and Chief
Compliance Officer and from May 2000 until January 2003 he was
Vice President, General Counsel (and Secretary since January
2001) of Roadway Corporation.
Mr. Hensel has been Vice President of the Company since
July 2002 and Treasurer since January 2005. He was Vice
President, Business Development from July 2002 until December
2004. Mr. Hensel also is a member of the Supervisory Board
of BERU AG.
Mr. Matthes has been Vice President of the Company and
President and General Manager of BorgWarner Transmission Systems
Inc. (Transmission Systems) since July 2005. He was
General Manager, Operations Europe for Transmission Systems from
August 2004 to July 2005. He was Vice President-Operations
Europe for Transmission Systems from January 2003 to August
2004. He was General Manager, DualTronic from November 2000
to July 2005.
13
Mr. Obermayer has been Vice President since December 1999
and Controller since January 2005. He was Vice President and
Treasurer of the Company from December 1999 to December 2004.
Mr. Waldhier has been Vice President of the Company since
November 2008 and Chief Executive Officer of BERU since October
2007. He was a member of the Management Board of SAS
Autosystemtechnik and Executive Vice President and Chief
Operating Officer of SAS Automotive from April 2004 to October
2007. He was Vice President of Faurecia Interior Systems from
January 2001 to March 2004.
Mr. Weber has been Vice President of the Company since July
2002. He has been President and General Manager of BorgWarner
Morse TEC Inc. (Morse TEC) since August 2005 and
BorgWarner Thermal Systems Inc. since January 2003. He was
President and General Manager of BorgWarner Emissions Systems
Inc. from July 2002 to July 2005. Mr. Weber also is a
member of the Supervisory Board of BERU AG.
Mr. Wood has been Vice President of the Company since
January 2001 and President and General Manager of BorgWarner
Turbo Systems Inc. and BorgWarner Emissions Systems Inc. since
August 2005. He was President and General Manager of Morse TEC
from January 2001 to July 2005.
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations. If any
of the following risks occur, our business including its
financial performance, financial condition, operating results
and cash flows could be materially adversely affected.
Our
industry is cyclical and our results of operations will be
adversely affected by industry downturns.
Automotive and truck production and sales are cyclical and
sensitive to general economic conditions and other factors
including interest rates, consumer credit, and consumer spending
and preferences. Further economic decline that results in
further significant reduction in automotive or truck production
would have a material adverse effect on our sales to original
equipment manufacturers.
We have initiated steps to realign and resize our production
capacity and cost structure to meet current and projected
operational and market requirements. Further significant
declines in the automotive industry and financial declines and
restructurings by our significant customers may make it
necessary to take further restructuring actions and charges.
We are
dependent on market segments that use our key products and would
be affected by decreasing demand in those
segments.
Some of our products, in particular turbochargers, are currently
used primarily in diesel passenger cars and commercial vehicles.
Any significant reduction in production in these market segments
or loss of business in these market segments could have a
material adverse effect on our sales to original equipment
manufacturers.
We
face strong competition.
We compete worldwide with a number of other manufacturers and
distributors that produce and sell products similar to ours.
Price, quality and technological innovation are the primary
elements of competition. Our competitors include vertically
integrated units of our major original equipment manufacturer
customers, as well as a large number of independent domestic and
international suppliers. We are not as large as a number of
these companies and do not have as many financial or other
resources. The competitive environment has changed dramatically
over the past few years as our traditional U.S. original
equipment manufacturer customers, faced with intense
international competition, have expanded their worldwide
sourcing of components. As a result, we have experienced
competition from suppliers in other parts of the world that
enjoy economic advantages, such as lower labor costs, lower
health care costs and, in some cases, export or raw materials
subsidies. Increased competition could adversely affect our
businesses.
14
We are
under substantial pressure from original equipment manufacturers
to reduce the prices of our products.
There is substantial and continuing pressure on original
equipment manufacturers to reduce costs, including costs of
products we supply. Although original equipment manufacturers
have indicated that they will continue to rely on outside
suppliers, a number of our major original equipment manufacturer
customers manufacture products for their own uses that directly
compete with our products. These original equipment
manufacturers could elect to manufacture such products for their
own uses in place of the products we currently supply. We
believe that our ability to develop proprietary new products and
to control our costs will allow us to remain competitive.
However, we cannot assure you that we will be able to improve or
maintain our gross margins on product sales to original
equipment manufacturers or that the recent trend by original
equipment manufacturers towards increased outsourcing will
continue.
Annual price reductions to original equipment manufacturer
customers appear to have become a permanent feature of our
business environment. To maintain our profit margins, we seek
price reductions from our suppliers, improve production
processes to increase manufacturing efficiency, update product
designs to reduce costs and develop new products, the benefits
of which support stable or increased prices. Our ability to pass
through increased raw material costs to our original equipment
manufacturer customers is limited, with cost recovery often less
than 100% and often on a delayed basis. We cannot assure you
that we will be able to reduce costs in an amount equal to
annual price reductions and increases in raw material costs.
We are
sensitive to the effects of our major customers labor
relations.
All three of our primary North American customers, Ford,
Chrysler and General Motors, have major union contracts with the
United Automobile, Aerospace and Agricultural Implement Workers
of America. Because of domestic original equipment
manufacturers dependence on a single union, we are
affected by labor difficulties and work stoppages at original
equipment manufacturers facilities. Similarly, a majority
of our global customers operations outside of North
America are also represented by various unions. Any extended
work stoppage could have an adverse effect on our business.
Part
of our labor force is unionized which could subject us to work
stoppages.
As of December 31, 2008, approximately 13% of our
U.S. workforce was unionized. Our two domestic collective
bargaining agreements are for our Muncie, Indiana plant and our
Ithaca and Cortland, New York facilities. The Muncie agreement
expires on April 24, 2009. The agreement covering the New
York facilities expires in September 2012. The hourly employees
at certain of our international facilities are also unionized.
While we believe that our relations with our employees are
satisfactory, a prolonged dispute with our employees could have
an adverse effect on our business.
We are
subject to extensive environmental regulations.
Our operations are subject to laws governing, among other
things, emissions to air, discharges to waters and the
generation, handling, storage, transportation, treatment and
disposal of waste and other materials. We believe that our
business, operations and activities have been and are being
operated in compliance in all material respects with applicable
environmental, health and safety laws. However, the operation of
automotive parts manufacturing plants entails risks in these
areas, and we cannot assure you that we will not incur material
costs or liabilities as a result. Furthermore, through various
acquisitions over the years, we have acquired a number of
manufacturing facilities, and we cannot assure you that we will
not incur materials costs and liabilities relating to activities
that predate our ownership. In addition, potentially significant
expenditures could be required in order to comply with evolving
environmental, health and safety laws that may be adopted in the
future.
15
We
have contingent liabilities related to environmental, product
warranties, regulatory matters, litigation and other
claims.
We and certain of our current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been
identified by the United States Environmental Protection Agency
and certain state environmental agencies and private parties as
potentially responsible parties at various hazardous waste
disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act and equivalent state laws. As a
result, as of December 31, 2008, we may be liable for the
cost of
clean-up and
other remedial activities at 35 of these sites.
We work with outside experts to determine a range of potential
liability for environmental sites. The ranges for each
individual site are then aggregated into a loss range for the
total accrued liability. Managements estimate of the loss
range for environmental liability, including conditional asset
retirement obligations, for 2008 is between $12.4 million
and $26.1 million. We record an accrual at the most
probable amount within the range unless one cannot be
determined; in which case we record the accrual at the low end
of the range. Based on information available to us, we have
established an accrual in our financial statements for indicated
environmental liabilities, including our conditional asset
retirement obligation under FIN 47, with a total balance of
$1.4 million at December 31, 2008. We currently expect
the substantial portion of this amount to be expended over the
next three to five years.
We provide warranties to our customers for some of our products.
Under these warranties, we may be required to bear costs and
expenses for the repair or replacement of these products. We
cannot assure you that costs and expenses associated with these
product warranties will not be material, or that those costs
will not exceed any amounts accrued for such warranties in our
financial statement. Based upon information available to us, we
have established an accrual in our financial statements for
product warranties of $82.1 million at December 31,
2008.
We are also party to, or have an obligation to defend a party
to, various legal proceedings, including those described in
Note 15 to the Notes to the Consolidated Financial
Statements in the Companys Annual Report on
Form 10-K.
We are currently, and may in the future become, subject to legal
proceedings and commercial or contractual disputes. These claims
typically arise in the normal course of business and may
include, but not be limited to, commercial or contractual
disputes with our suppliers, intellectual property matters and
employment claims. There is a possibility that such claims may
have an adverse impact on our business that is greater than we
anticipate.
Our
growth strategy may prove unsuccessful.
We have a stated goal of increasing revenues and operating
revenues at a rate greater than global vehicle production by
increasing content per vehicle with innovative new components
and through select acquisitions. We may not meet our goal
because of any of the following: (a) the failure to develop
new products which will be purchased by our customers;
(b) technology changes rendering our products obsolete;
(c) a reversal of the trend of supplying systems (which
allows us to increase content per vehicle) instead of
components; and (d) the failure to find suitable
acquisition targets or the failure to integrate operations of
acquired businesses quickly and cost effectively.
We are
subject to risks related to our international
operations.
We have manufacturing and technical facilities in many regions
and countries, including North America, Europe, China, India,
South Korea, Japan, and Brazil and sell our products worldwide.
For 2008, approximately 68% of our sales were outside North
America. Consequently, our results could be affected by changes
in trade, monetary and fiscal policies, trade restrictions or
prohibitions, import or other charges or taxes, and fluctuations
in foreign currency exchange rates, limitations on the
repatriation of funds changing economic conditions, social
unrest, political instability and disputes, and international
terrorism. Compliance with multiple and potentially conflicting
laws and regulations of various countries is burdensome and
expensive. See Note 21, Reporting
16
Segments and Related Information to Consolidated Financial
Statements in the Companys Annual Report on
Form 10-K.
We may
not realize sales represented by awarded business.
We base our growth projections, in part, on commitments made by
our customers. These commitments generally renew yearly during a
program life cycle. If actual production orders from our
customers do not approximate such commitments, it could
adversely affect our business.
We are
impacted by the rising cost of providing pension and other post
employment benefits.
The automotive industry, like other industries, continues to be
impacted by the rising cost of providing pension and other post
employment benefits. To partially address this impact, we
announced adjustments to certain retiree medical and pension
plans to be effective January 1, 2009. See Note 12,
Retirement Benefit Plans to the Consolidated
Financial Statements in the Companys Annual Report on
Form 10-K.
Certain
defined benefit pension plans we sponsor are currently
underfunded.
We sponsor certain defined benefit pension plans worldwide that
are underfunded and will require cash payments. Additionally, if
the performance of the assets in our pension plans does not meet
our expectations, or if other actuarial assumptions are
modified, our required contributions may be higher than we
expect. See Note 12, Retirement Benefit Plans
to the Consolidated Financial Statements in the Companys
Annual Report on
Form 10-K.
Negative
or unexpected tax consequences could adversely affect our
business.
Adverse changes in the underlying profitability and financial
outlook of our operations in several jurisdictions could lead to
changes in our valuation allowances against deferred tax assets
and other tax accruals that could adversely affect our financial
performance.
Additionally, we are subject to tax audits by governmental
authorities in the U.S. and numerous
non-U.S. jurisdictions.
Because the results of tax audits are inherently uncertain,
negative or unexpected results from one or more such tax audits
could adversely affect our business.
We
rely on sales to major customers.
We rely on sales to original equipment manufacturers around the
world. Supply to several of these customers requires significant
investment by the Company in working capital, plant and
equipment. Some of our customers are rated by the credit rating
agencies as below investment grade. The loss of sales to a major
customer, due to any of a variety of factors including
non-renewal of purchase orders, the customers financial
hardship or other unforeseen reasons, could adversely affect our
business.
Furthermore, some of our sales are concentrated. Our worldwide
sales in 2008 to Volkswagen and Ford constituted approximately
19% and 9%, respectively, of our 2008 consolidated sales.
Suppliers
economic distress could result in the disruption of our
operations and have a material effect on our
business.
Unfavorable industry conditions such as lower production
volumes; credit tightness; changes in foreign currencies; raw
material, commodity, transportation, and energy price
escalation; drastic changes in consumer preferences; and others
could adversely affect our supply chain, and sometimes with
little advanced notice. These conditions could also result in
increased commercial disputes and supply interruption risks. In
certain instances, it would be difficult and expensive for us to
change suppliers that are critical to our business. On occasion,
we must provide financial support to distressed suppliers or
take other measures to protect our supply lines. While we have
taken definite actions to mitigate these factors, we can not
predict with certainty the potential adverse effects these costs
might have on our business.
17
We
continue to face highly volatile commodity costs used in the
production of our products.
The Company uses a variety of commodities (including steel,
nickel, copper, aluminum, plastic resins, other raw materials
and energy) and materials purchased in various forms such as
castings, powder metal, forgings, stampings, and bar stock.
Increasing commodity costs will have an impact on our results.
We have sought to alleviate the impact of increasing costs by
selectively hedging certain commodity exposures or by including
a material pass-through provision in our customer contracts
wherever possible. Customers frequently challenge these
contractual provisions and rarely pay the full cost of any
materials increases. The continuation of this practice would
adversely affect our business.
From time to time, commodity prices may also fall rapidly. When
this happens, suppliers may withdraw capacity from the market
until prices improve which may cause periodic supply
interruptions. The same may be true of our transportation
carriers and energy providers.
We
could be adversely affected by supply shortages of components
from our suppliers.
In an effort to manage and reduce the cost of purchased goods
and services, we have been rationalizing our supply base. As a
result, we are dependent on fewer sources of supply for certain
components used in the manufacture of our products. The Company
selects suppliers based on total value (including total landed
price, quality, delivery, and technology), taking into
consideration their production capacities and financial
condition. We expect that they will deliver to our stated
written expectations.
However, there can be no assurance that capacity limitations,
labor unrest, weather emergencies, commercial disputes,
government actions, riots, wars, sabotage, non-conforming parts,
acts of terrorism, Acts of God, or other problems
experienced by our suppliers will not result in occasional
shortages or delays in their supply of components to us. If we
were to experience a significant or prolonged shortage of
critical components from any of our suppliers and could not
procure the components from other sources, we would be unable to
meet the production schedules for some of our key products and
could miss customer delivery expectations. This would adversely
affect our customer relations and business.
A
downgrade in the ratings of our debt could restrict our ability
to access the debt capital markets.
Changes in the ratings that rating agencies assign to our debt
may ultimately impact our access to the debt capital markets and
the costs we incur to borrow funds. If ratings for our debt fall
below investment grade, our access to the debt capital markets
would become restricted. The tightening in the credit markets
and the low level of liquidity in many financial markets due to
the current turmoil in the financial and banking industries
could also affect our access to the debt capital markets. In the
event the Company is unable to access the debt capital markets,
we would have the ability to draw on our $600 million
revolving credit facility; however, this agreement is scheduled
to expire July 22, 2009.
Additionally, our revolving credit agreement includes an
increase in interest rates if the ratings for our debt are
downgraded. Further, an increase in the level of our
indebtedness and related interest costs may increase our
vulnerability to adverse general economic and industry
conditions and may affect our ability to obtain additional
financing.
Conditions
in the automotive industry may adversely affect our
business.
Our financial performance depends on conditions in the global
automotive industry. Ford Motor Company, General Motors
Corporation and Chrysler LLP (collectively the Detroit
3) have experienced declining market shares and are
burdened with significant structural costs that have affected
their profitability and labor relations and may ultimately
result in severe financial difficulty, including possible
bankruptcy. If the Detroit 3 cannot fund their operations or if
major customers reach similar levels of financial distress we
may incur significant write-offs of accounts receivable, incur
impairment charges or require additional restructuring actions
beyond those already taken. Automakers across Europe are also
experiencing difficulties from a weakened economy and tightening
credit markets. If our customers reduce their orders to us, it
would adversely affect our results of operations. A prolonged
downturn in the North American or European automotive industries
or a significant
18
product mix shift due to consumer demand could require us to
shut down plants or incur impairment charges. Continued
uncertainty relating to the financial condition of the Detroit 3
and other automakers would have a negative impact on our
business.
We are
subject to possible insolvency of financial
counterparties.
The Company engages in numerous financial transactions and
contracts including insurance policies, letters of credit,
credit line agreements, financial derivatives, and investment
management agreements involving various counterparties. The
Company is subject to the risk that one or more of these
counterparties may become insolvent and therefore be unable to
discharge its obligations under such contracts.
We are
subject to possible insolvency of outsourced service
providers.
The Company relies on third party service providers for
administration of workers compensation claims, health care
benefits, pension benefits, stockholder and bondholder
registration and similar services. These service providers
contribute to the efficient conduct of the Companys
business, so the Company could be adversely affected in the
event of insolvency of one or more of these service providers.
A
variety of other factors could adversely affect our
business.
Any of the following could materially and adversely affect our
business: the loss of or changes in supply contracts or sourcing
strategies of our major customers or suppliers; startup
expenses associated with new vehicle programs or delays or
cancellation of such programs, underutilization of our
manufacturing facilities, which can be dependent on a single
product line or customer; inability to recover engineering and
tooling costs; market and financial consequences of recalls that
may be required on products we supplied; delays or difficulties
in new product development; the possible introduction of similar
or superior technologies by others; and global overcapacity and
vehicle platform proliferation.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
The Company has received no written comments regarding its
periodic or current reports from the staff of the Securities and
Exchange Commission that were issued 180 days or more
preceding the end of its 2008 fiscal year and that remain
unresolved.
As of December 31, 2008, the Company had 60 manufacturing,
assembly, and technical locations worldwide. In addition to its
14 U.S. manufacturing locations, the Company has 10
locations in Germany; five locations in each of India and Korea;
three locations in each of the United Kingdom, France, China,
and Japan; and one location in each of Brazil, Canada, Hungary,
Ireland, Italy, Monaco, Mexico, Poland, Spain, and Taiwan. The
Company also has several sales offices, warehouses and technical
centers. The Companys worldwide headquarters are located
in a leased facility in Auburn Hills, Michigan. In general, the
Company believes its facilities to be suitable and adequate to
meet its current and reasonably anticipated needs.
19
The following is additional information concerning the principal
manufacturing, assembly, and technical facilities operated by
the Company, its subsidiaries, and affiliates.(a)
ENGINE
|
|
|
|
|
Americas:
|
|
Europe:
|
|
Asia:
|
|
Asheville, North Carolina
|
|
Arcore, Italy
|
|
Aoyama, Japan
|
Auburn Hills, Michigan
|
|
Bradford, England
|
|
Changwon, South Korea(b)
|
Cadillac, Michigan
|
|
Bretten, Germany
|
|
Chennai, India
|
Campinas, Brazil
|
|
Chazelles, France
|
|
Chungju-City, South Korea
|
Cortland, New York
|
|
Diss, England
|
|
Kakkalur, India
|
Dixon, Illinois
|
|
Kandel, Germany(b)
|
|
Nabari City, Japan
|
Fletcher, North Carolina
|
|
Kirchheimbolanden, Germany
|
|
Ningbo, China
|
Guadalajara, Mexico
|
|
La Ferte Mace, France
|
|
Pune, India
|
Ithaca, New York
|
|
Ludwigsburg, Germany
|
|
Pyongtaek, South Korea(b)
|
Marshall, Michigan
|
|
Markdorf, Germany
|
|
Tainan Shien, Taiwan
|
Sallisaw, Oklahoma
|
|
Muggendorf, Germany
|
|
|
Simcoe, Ontario, Canada
|
|
Neuhaus, Germany
|
|
|
|
|
Oroszlany, Hungary
|
|
|
|
|
Rzeszow, Poland
|
|
|
|
|
Tralee, Ireland
|
|
|
|
|
Vitoria, Spain
|
|
|
DRIVETRAIN
|
|
|
|
|
Americas:
|
|
Europe:
|
|
Asia:
|
|
Addison, Illinois(b)
|
|
Arnstadt, Germany
|
|
Beijing, China
|
Auburn Hills, Michigan
|
|
Heidelberg, Germany
|
|
Eumsung, South Korea
|
Bellwood, Illinois
|
|
Ketsch, Germany
|
|
Fukuroi City, Japan
|
Frankfort, Illinois
|
|
Margam, Wales(d)
|
|
Ningbo, China
|
Livonia, Michigan
|
|
Principality of Monaco
|
|
Ochang, South Korea(b)
|
Longview, Texas
|
|
Tulle, France
|
|
Pune, India
|
Muncie, Indiana(c)
|
|
|
|
Shanghai, China
|
Seneca, South Carolina
|
|
|
|
Sirsi, India
|
Water Valley, Mississippi
|
|
|
|
|
|
|
|
(a) |
|
The table excludes joint ventures owned less than 50% and
administrative offices in Auburn Hills, Michigan USA and
Shanghai, China. |
|
(b) |
|
Indicates leased land rights or a facility. |
|
(c) |
|
Announced closure plans for 2009. |
|
(d) |
|
Announced closure plans for 2010. |
|
|
Item 3.
|
Legal
Proceedings
|
The Company is subject to a number of claims and judicial and
administrative proceedings (some of which involve substantial
amounts) arising out of the Companys business or relating
to matters for which the Company may have a contractual
indemnity obligation. Refer to Note 15,
Contingencies of the Notes to the Consolidated
Financial Statements in Item 8 of this report for a
discussion of environmental, asbestos and other litigation.
20
In January 2006, BorgWarner Diversified Transmission Products
Inc (DTP), a subsidiary of the Company, filed a
declaratory judgment action in United States District Court,
Southern District of Indiana (Indianapolis Division) against the
United Automobile, Aerospace, and Agricultural Implements
Workers of America (UAW) Local No. 287 and
Gerald Poor, individually and as the representative of a
defendant class. DTP sought the Courts affirmation that
DTP did not violate the Labor-Management Relations Act or the
Employee Retirement Income Security Act by unilaterally amending
certain medical plans effective April 1, 2006 and
October 1, 2006, prior to the expiration of the current
collective bargaining agreements. On September 10, 2008,
the Court found that DTPs reservation of the right to make
such amendments reducing the level of benefits provided to
retirees was limited by its collectively bargained health
insurance agreement with the UAW, which does not expire until
April 24, 2009. Thus, the amendments were untimely. In 2008
the Company recorded a charge of $4.0 million as a result
of the Courts decision.
The Company has communicated its plan to reduce the level of
benefits provided to the retirees to make them comparable to
other Company retiree benefit plans. The change will be
effective following expiration of the health insurance agreement
in April 24, 2009.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no matters submitted to the Companys security
holders during the fourth quarter of 2008.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
The Companys Common Stock is listed for trading on the New
York Stock Exchange under the symbol BWA. As of February 6,
2009, there were 2,463 holders of record of Common Stock.
The Company has increased its declared dividend during each of
the last seven years. Cash dividends declared and paid per
share, adjusted for stock splits in 2004 and 2007, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Dividend Amount
|
|
$
|
0.44
|
|
|
$
|
0.34
|
|
|
$
|
0.32
|
|
|
$
|
0.28
|
|
|
$
|
0.25
|
|
While the Company currently expects that the 2009 quarterly cash
dividend of $0.12 per share ($0.48 per year) will continue to be
paid in the future, the dividend policy is subject to review and
change at the discretion of the Board of Directors.
High and low sales prices* (as reported on the New York Stock
Exchange composite tape) for the Common Stock for each quarter
in 2007 and 2008 were:
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
March 31, 2007
|
|
$
|
39.31
|
|
|
$
|
29.02
|
|
June 30, 2007
|
|
$
|
43.43
|
|
|
$
|
36.63
|
|
September 30, 2007
|
|
$
|
48.08
|
|
|
$
|
37.73
|
|
December 31, 2007
|
|
$
|
53.00
|
|
|
$
|
46.11
|
|
March 31, 2008
|
|
$
|
51.39
|
|
|
$
|
40.16
|
|
June 30, 2008
|
|
$
|
55.99
|
|
|
$
|
42.30
|
|
September 30, 2008
|
|
$
|
45.54
|
|
|
$
|
30.82
|
|
December 31, 2008
|
|
$
|
32.69
|
|
|
$
|
15.00
|
|
* All amounts have been restated, per the
2-for-1
stock split that was effected through a stock dividend on
December 17, 2007.
21
The line graph below compares the cumulative total shareholder
return on our Common Stock with the cumulative total return of
companies on the Standard & Poors
(S&Ps) 500 Stock Index, companies within
BorgWaners peer group, and companies within Standard
Industrial Code (SIC) 3714 Motor Vehicle
Parts.
This graph assumes the investment of $100 on September 1,
2003 and the reinvestment of all dividends since that date.
5 Year
Cumulative Total Return (%)
BWA, S&P 500 and Peer Group data gleaned from Capital IQ;
SIC Code Index gleaned from Research Data Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
BorgWarner Inc.(1)
|
|
|
|
100.00
|
|
|
|
|
128.95
|
|
|
|
|
145.86
|
|
|
|
|
143.55
|
|
|
|
|
237.45
|
|
|
|
|
108.08
|
|
S&P 500(2)
|
|
|
|
100.00
|
|
|
|
|
108.99
|
|
|
|
|
112.27
|
|
|
|
|
127.56
|
|
|
|
|
132.06
|
|
|
|
|
81.23
|
|
SIC Code Index(3)
|
|
|
|
100.00
|
|
|
|
|
109.81
|
|
|
|
|
93.13
|
|
|
|
|
108.37
|
|
|
|
|
114.92
|
|
|
|
|
52.88
|
|
Peer Group(4)
|
|
|
|
100.00
|
|
|
|
|
106.56
|
|
|
|
|
103.25
|
|
|
|
|
117.89
|
|
|
|
|
127.17
|
|
|
|
|
53.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
BorgWarner Inc. |
|
(2) |
|
S&P 500 Standard & Poors 500
Total Return Index |
|
(3) |
|
Standard Industrial (SIC) 3714-Motor Vehicle Parts |
|
(4) |
|
Peer Group Companies Consists of the following
companies: |
|
|
American Axle & Manufacturing Holdings, Inc., Arvin
Meritor Inc., Autoliv Inc., Gentex Corp., Johnson Controls
Inc., Lear Corporation, Magna International, Inc., Modine
Manufacturing Co., Tenneco Automotive, Inc., TRW Automotive
Holdings Corp. and Visteon Corporation |
Repurchases
of Equity Securities
The Companys Board of Directors previously authorized the
purchase of up to 9.8 million shares (adjusted for the
companys 2007
two-for-one
stock split) of the Companys common stock. As of
December 31, 2008, the Company has repurchased
5,422,428 shares.
All shares purchased under this authorization have been and will
continue to be repurchased in the open market at prevailing
prices and at times the amounts to be determined by management
as market conditions and the Companys capital position
warrant. The Company may use
Rule 10b5-1
plans to facilitate share repurchases.
22
Repurchased shares will be deemed treasury shares and may
subsequently be reissued for general corporate purposes.
The following table provides information about Company purchases
of its equity securities that are registered pursuant to
Section 12 of the Exchange Act during the quarter ended
December 31, 2008, at a total cost of $7.4 million:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Maximum Number of Shares
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
as Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Plans or Programs
|
|
|
the Plans or Programs
|
|
|
Month Ended
October 31, 2008
|
|
|
230,000
|
|
|
$
|
23.81
|
|
|
|
230,000
|
|
|
|
4,463,072
|
|
Month Ended
November 30, 2008
|
|
|
85,500
|
|
|
|
23.04
|
|
|
|
85,500
|
|
|
|
4,377,572
|
|
Month Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,377,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
315,500
|
|
|
$
|
23.60
|
|
|
|
315,500
|
|
|
|
4,377,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: all purchases were made on the open market.
Equity
Compensation Plan Information
As of December 31, 2008, the number of stock options and
restricted common stock outstanding under our equity
compensation plans, the weighted average exercise price of
outstanding options and restricted common stock, and the number
of securities remaining available for issuance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Compensation Plans
|
|
|
|
Restricted Common Stock,
|
|
|
Restricted Common Stock,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
6,459,201
|
|
|
$
|
29.65
|
|
|
|
1,648,449
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,459,201
|
|
|
$
|
29.65
|
|
|
|
1,648,449
|
|
|
|
Item 6.
|
Selected
Financial Data
|
Refer to Note 21, Reporting Segments and Related
Information of the Notes to the Consolidated Financial
Statements in Item 8 of this report for Selected Financial
Data for the five years ended December 31, 2008. See the
material in response to Item 7 of this report for a
discussion of the factors that materially affect the
comparability of the information contained in such data.
23
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the
Company) is a leading global supplier of highly
engineered systems and components primarily for powertrain
applications. Our products help improve vehicle performance,
fuel efficiency, air quality and vehicle stability. They are
manufactured and sold worldwide, primarily to original equipment
manufacturers (OEMs) of light vehicles (i.e.
passenger cars, sport-utility vehicles (SUVs),
cross-over vehicles, vans and light trucks). Our products are
also manufactured and sold to OEMs of commercial trucks, buses
and agricultural and off-highway vehicles. We also manufacture
for and sell our products to certain Tier One vehicle
systems suppliers and into the aftermarket for light and
commercial vehicles. We operate manufacturing facilities serving
customers in the Americas, Europe and Asia, and are an original
equipment supplier to every major automaker in the world.
The Companys products fall into two reporting segments:
Engine and Drivetrain. The Engine segments products
include turbochargers, timing chain systems, air management,
emissions systems, thermal systems, as well as diesel and gas
ignition systems. The Drivetrain segments products include
all-wheel drive transfer cases, torque management systems, and
components and systems for automated transmissions.
Stock
Split
On November 14, 2007, the Companys Board of Directors
approved a
two-for-one
stock split effected in the form of a stock dividend on its
common stock. To implement this stock split, shares of common
stock were issued on December 17, 2007 to stockholders of
record as of the close of business on December 6, 2007. All
prior year share and per share amounts disclosed in this
document have been restated to reflect the
two-for-one
stock split.
RESULTS
OF OPERATIONS
Overview
A summary of our operating results for the years ended
December 31, 2008, 2007 and 2006 is as follows:
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|
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|
millions of dollars, except per share data
|
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|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
5,263.9
|
|
|
$
|
5,328.6
|
|
|
$
|
4,585.4
|
|
Cost of sales
|
|
|
4,425.4
|
|
|
|
4,378.7
|
|
|
|
3,735.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
838.5
|
|
|
|
949.9
|
|
|
|
849.9
|
|
Selling, general and administrative expenses
|
|
|
542.9
|
|
|
|
531.9
|
|
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|
498.1
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|
Restructuring expense
|
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|
127.5
|
|
|
|
|
|
|
|
84.7
|
|
Goodwill impairment charge
|
|
|
156.8
|
|
|
|
|
|
|
|
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|
Other income
|
|
|
(3.1
|
)
|
|
|
(6.8
|
)
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating income
|
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|
14.4
|
|
|
|
424.8
|
|
|
|
274.6
|
|
Equity in affiliates earnings, net of tax
|
|
|
(38.4
|
)
|
|
|
(40.3
|
)
|
|
|
(35.9
|
)
|
Interest expense and finance charges
|
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|
38.8
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|
|
|
34.7
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|
|
|
40.2
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Earnings before income taxes and minority interest
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14.0
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|
430.4
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|
|
|
270.3
|
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Provision for income taxes
|
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|
33.3
|
|
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|
113.9
|
|
|
|
32.4
|
|
Minority interest, net of tax
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|
16.3
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|
28.0
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|
26.3
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|
|
|
|
|
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Net earnings (loss)
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|
$
|
(35.6
|
)
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|
$
|
288.5
|
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|
$
|
211.6
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Earnings (loss) per share diluted
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$
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(0.31
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)
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$
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2.45
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$
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1.83
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24
A summary of major factors impacting the Companys net
earnings for the year ended December 31, 2008 in comparison
to 2007 and 2006 is as follows:
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Global financial market and economic crisis in the second half
of 2008 significantly impacted consumer demand for light
vehicles and negatively impacted our sales.
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Continued demand for our products in both Engine and Drivetrain
segments.
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Lower North American production of light trucks and SUVs.
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Continued benefits from our cost reduction programs, including
containment of raw material and energy cost increases, health
care cost inflation and the costs related to global expansion.
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|
Restructuring expenses in the third and fourth quarters of 2006
to adjust headcount and capacity levels, primarily in North
America and primarily in the Drivetrain segment.
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|
Restructuring expenses in the third and fourth quarters of 2008
to adjust headcount and capacity levels, in North America,
Europe and Asia.
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|
The write-offs of the excess purchase price allocated to
in-process research and development (IPR&D),
order backlog and beginning inventory related to the 2007
acquisition of approximately 12.8% of BERU AG (BERU)
stock and the 2008 completion of a Domination and Profit
Transfer Agreement (DPTA) between the Company and
BERU.
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The write-offs of the excess purchase price allocated to
IPR&D, order backlog and beginning inventory related to the
2006 acquisition of the European Transmission and Engine
Controls (ETEC) product lines from Eaton in Monaco.
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Favorable currency impact of $13.0 million,
$15.2 million and $0.4 million in 2008, 2007 and 2006,
respectively.
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|
Adjustments to tax accounts in 2008, 2007 and 2006 upon
conclusion of certain tax audits and changes in circumstances,
including changes in tax laws.
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An approximate $14 million provision in 2007 for a
warranty-related issue surrounding a product, built during a
15-month
period in 2004 and 2005, that is no longer in production.
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An approximate $23.5 million warranty-related issue
associated with the companys transmission product sold in
Europe, limited to mid-2007 through May 2008 production.
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An 111.5 million $(156.8 million) impairment
charge in 2008 to adjust BERUs goodwill to its estimated
fair value.
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Recognition in 2008 of a $4.0 million charge related to an
untimely change in the level of benefits provided to BorgWarner
Diversified Transmission Products Inc (DTP) retirees.
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The establishment of a valuation allowance for foreign tax
credit carryforwards in 2008 of $13.5 million.
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25
The Companys earnings (loss) per diluted share were
$(0.31), $2.45 and $1.83 for the years ended December 31,
2008, 2007 and 2006, respectively. The Company believes the
following table is useful in highlighting non-recurring or
non-comparable items that impacted its earnings per diluted
share:
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Year Ended December 31,
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2008
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2007
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2006
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|
Non-recurring or non-comparable items:
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|
|
|
|
|
|
|
|
|
|
Goodwill impairment charge
|
|
$
|
(1.35
|
)
|
|
$
|
|
|
|
$
|
|
|
Restructuring expense
|
|
|
(0.72
|
)
|
|
|
|
|
|
|
(0.41
|
)
|
Transmission product related warranty charge
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|
|
(0.14
|
)
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|
|
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|
|
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|
Tax valuation allowance
|
|
|
(0.12
|
)
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|
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Write-off of the excess purchase price
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|
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|
|
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|
allocated to IPR&D, order backlog and beginning
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inventory associated with acquisitions
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|
(0.04
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)
|
|
|
(0.02
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)
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|
|
(0.02
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)
|
Net gain from divestitures
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|
|
0.03
|
|
Adjustments to tax accounts
|
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|
0.02
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|
|
|
0.03
|
|
|
|
0.19
|
|
Retiree healthcare litigation outcome
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|
(0.03
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)
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Total impact to earnings per share diluted:
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$
|
(2.38
|
)
|
|
$
|
0.01
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|
$
|
(0.21
|
)
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|
The Companys effective tax rate, after giving tax effect
to the non-recurring or non-comparable items shown above, was
23.0%, 27.1%, and 26.0% for 2008, 2007, and 2006, respectively.
Net
Sales
The table below summarizes the overall worldwide global light
vehicle production percentage changes for 2008 and 2007:
Worldwide
Light Vehicle Year Over Year Increase (Decrease) in
Production
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2008
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2007
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|
North America*
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|
(15.8
|
)%
|
|
|
(1.5
|
)%
|
Europe*
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|
(4.5
|
)%
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|
|
5.6
|
%
|
Asia*
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|
2.4
|
%
|
|
|
7.1
|
%
|
Total Worldwide*
|
|
|
(3.7
|
)%
|
|
|
5.0
|
%
|
BorgWarner year over year net sales change
|
|
|
(1.2
|
)%
|
|
|
16.2
|
%
|
|
|
|
* |
|
Data provided by CSM Worldwide. |
Our net sales decrease in 2008 of 1.2% was slightly better than
the estimated worldwide market production decrease of 3.7%. Our
net sales increase in 2007 of 16.2% was strong in light of the
estimated worldwide market production increase of 5.0%. The
effect of changing currency rates had a positive impact on the
Companys net sales and net earnings in 2008 and 2007. The
effect of
non-U.S. currencies,
primarily the Euro, increased net sales by $191.0 million
and reduced the Companys net loss by $13.0 million in
2008. In 2007,
non-U.S. currencies,
primarily the Euro, added $262.1 million to net sales and
$15.2 million to net earnings. The year over year decrease
in net sales, excluding the favorable impact of currency, was
4.8% in 2008. The year over year increase in net sales,
excluding the favorable impact of currency, was 10.5% in 2007.
Consolidated net sales included sales to Volkswagen of
approximately 19%, 15%, and 13%; to Ford of approximately 9%,
12%, and 13%; and to Daimler of approximately 6%, 6%, and 11%
for the years ended December 31, 2008, 2007 and 2006,
respectively. Daimler divested Chrysler in 2007. Both of our
reporting segments had significant sales to all three of the
customers listed above. Such sales consisted of a variety of
products to a variety of customer locations and regions. No
other single customer accounted for more than 10% of
consolidated sales in any year of the periods presented.
26
Outlook
The Company is very cautious about 2009. The recent crisis in
the financial sector and deteriorating global economic
conditions have increased uncertainty about automotive vehicle
sales in every geographic region of the world. The Company
expects the unprecedented current global economic environment to
continue to affect near-term results and to create difficult
conditions through 2009.
The Company maintains a positive long-term outlook for its
global business and is committed to new product development and
strategic capital investments to enhance its product leadership
strategy. The trends that are driving our long-term growth are
expected to continue, including the growth of direct injection
diesel and gasoline engines worldwide, the increased adoption of
automated transmissions in Europe and Asia-Pacific, and the move
to chain engine timing systems in both Europe and Asia-Pacific.
The impact of
non-U.S. currencies
is currently expected to be a decline in 2009. When the recovery
from current global economic conditions occur, we expect
long-term sales and net earnings growth to resume to historical
rates.
Results
By Reporting Segment
The Companys business is comprised of two reporting
segments: Engine and Drivetrain. These segments are strategic
business groups, which are managed separately as each represents
a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the
projected after-tax return on invested capital
(ROIC) of its business initiatives. The ROIC is
comprised of projected earnings before interest and taxes
(EBIT) adjusted for taxes compared to the projected
average capital investment required.
EBIT is considered a non-GAAP financial measure.
Generally, a non-GAAP financial measure is a numerical measure
of a companys financial performance, financial position or
cash flows that excludes (or includes) amounts that are included
in (or excluded from) the most directly comparable measure
calculated and presented in accordance with GAAP. EBIT is
defined as earnings before interest, taxes and minority
interest. Earnings is intended to mean net earnings
as presented in the Consolidated Statements of Operations under
GAAP.
The Company believes that EBIT is useful to demonstrate the
operational profitability of its segments by excluding interest
and taxes, which are generally accounted for across the entire
Company on a consolidated basis. EBIT is also one of the
measures used by the Company to determine resource allocation
within the Company. Although the Company believes that EBIT
enhances understanding of its business and performance, it
should not be considered an alternative to, or more meaningful
than, net earnings or cash flows from operations as determined
in accordance with GAAP.
The following tables present net sales and Segment EBIT by
segment for the years 2008, 2007 and 2006:
Net
Sales
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|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Engine
|
|
$
|
3,861.5
|
|
|
$
|
3,761.3
|
|
|
$
|
3,154.9
|
|
Drivetrain
|
|
|
1,426.4
|
|
|
|
1,598.8
|
|
|
|
1,461.4
|
|
Inter-segment eliminations
|
|
|
(24.0
|
)
|
|
|
(31.5
|
)
|
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,263.9
|
|
|
$
|
5,328.6
|
|
|
$
|
4,585.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Earnings
Before Interest and Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Engine
|
|
$
|
394.9
|
|
|
$
|
418.0
|
|
|
$
|
365.8
|
|
Drivetrain
|
|
|
(4.9
|
)
|
|
|
118.1
|
|
|
|
90.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings before interest and taxes (Segment
EBIT)
|
|
|
390.0
|
|
|
|
536.1
|
|
|
|
456.4
|
|
Restructuring expense
|
|
|
(127.5
|
)
|
|
|
|
|
|
|
(84.7
|
)
|
Goodwill impairment charge
|
|
|
(156.8
|
)
|
|
|
|
|
|
|
|
|
Corporate, including equity in affiliates earnings
|
|
|
(52.9
|
)
|
|
|
(71.0
|
)
|
|
|
(61.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated earnings before interest and taxes
(EBIT)
|
|
|
52.8
|
|
|
|
465.1
|
|
|
|
310.5
|
|
Interest expense and finance charges
|
|
|
38.8
|
|
|
|
34.7
|
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
14.0
|
|
|
|
430.4
|
|
|
|
270.3
|
|
Provision for income taxes
|
|
|
33.3
|
|
|
|
113.9
|
|
|
|
32.4
|
|
Minority interest, net of tax
|
|
|
16.3
|
|
|
|
28.0
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(35.6
|
)
|
|
$
|
288.5
|
|
|
$
|
211.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Engine segment 2008 net sales were up 2.7% from
2007, with a 5.5% decrease in Segment EBIT over the same period.
The Engine segment continued to benefit from Asian automaker
demand for turbochargers and timing systems, European automaker
demand for turbochargers, timing systems, exhaust gas
recirculation (EGR) valves and diesel engine
ignition systems. This benefit was offset by lower North
American production of light truck and sport-utility vehicles.
The Segment EBIT margin was 10.2% in 2008, down from 11.1% in
2007 (which includes the one-time write-off in 2008 of the
excess purchase price allocated to BERUs IPR&D, order
backlog and inventory), due to the significant reduction in
customer production schedules in the U.S. and European markets,
and increased costs for raw materials, principally steel.
The Engine segment 2007 net sales were up 19.2% from 2006,
with a 14.3% increase in Segment EBIT over the same period. The
Engine segment continued to benefit from Asian automaker demand
for turbochargers and timing systems, European automaker demand
for turbochargers, timing systems, exhaust gas recirculation
(EGR) valves and diesel engine ignition systems, the
continued roll-out of its variable cam timing systems with
General Motors high-value V6 engines, stronger EGR valve sales
in North America, and higher turbocharger and thermal products
sales due to stronger global commercial vehicle production. The
Segment EBIT margin was 11.1% in 2007 down from 11.6% in 2006
(which includes the one-time write-off in 2007 of the excess
purchase price allocated to BERUs IPR&D, order
backlog and inventory), due to the significant reduction in
customer production schedules in the U.S. market and
increased costs for raw materials, principally nickel.
The Drivetrain segment 2008 net sales decreased
10.8% from 2007 with a 104.1% decrease in Segment EBIT over the
same period. The group was negatively impacted by lower
U.S. production of light trucks and SUVs equipped with its
torque transfer products and lower sales of its traditional
transmission products. Segment EBIT margin was (0.3)% in 2008,
down from 7.4% in the prior year, due to the combined effect of
DCT product
start-up
cost pressures and lower North American production of light
trucks and sport-utility vehicles equipped with its torque
transfer products.
The Drivetrain segment 2007 net sales increased 9.4% from
2006 with a 30.4% increase in Segment EBIT over the same period.
The segment continued to benefit from growth outside of North
America including the continued ramp up of dual-clutch
transmission and torque transfer product sales in Europe. In the
U.S., the group was negatively impacted by lower production of
light trucks and SUVs equipped with its torque transfer products
and lower sales of its traditional transmission products.
Segment EBIT margin was 7.4% in 2007, up from 6.2% in the prior
year, due to the benefits of restructuring in its North American
operations and growth outside of the U.S.
Corporate is the difference between calculated total
Company EBIT and the total of the Segments EBIT. It
represents corporate headquarters expenses, expenses not
directly attributable to the individual segments and
28
equity in affiliates earnings. This net expense was
$52.9 million in 2008, $71.0 million in 2007 and
$61.2 million in 2006.
Other
Factors Affecting Results of Operations
The following table details our results of operations as a
percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
84.1
|
|
|
|
82.2
|
|
|
|
81.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
15.9
|
|
|
|
17.8
|
|
|
|
18.5
|
|
Selling, general and administrative expenses
|
|
|
10.3
|
|
|
|
10.0
|
|
|
|
10.9
|
|
Restructuring expense
|
|
|
2.4
|
|
|
|
|
|
|
|
1.8
|
|
Goodwill impairment charge
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
0.3
|
|
|
|
8.0
|
|
|
|
6.0
|
|
Equity in affiliates earnings, net of tax
|
|
|
(0.7
|
)
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
Interest expense and finance charges
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
0.3
|
|
|
|
8.1
|
|
|
|
5.9
|
|
Provision for income taxes
|
|
|
0.7
|
|
|
|
2.2
|
|
|
|
0.7
|
|
Minority interest, net of tax
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
(0.7
|
)%
|
|
|
5.4
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of net sales was 15.9%,
17.8% and 18.5% in 2008, 2007 and 2006, respectively. Our gross
profit decrease in 2008 is due to unfavorable product mix as a
result of the sudden decline in the North American and
European automotive markets, including a 15.8% decrease in light
truck and SUV production in North America. The Company has
restructured its North American and European operations in the
third and fourth quarters of 2008 to align the Companys
workforce with forecasted production.
Selling, general and administrative expenses
(SG&A) as a percentage of net sales were 10.3%,
10.0% and 10.9% in 2008, 2007 and 2006 respectively. The 2008
increase in SG&A as a percentage of net sales was primarily
due to $8.0 million of amortization for the recognition of
the remaining 17.8% of the fair value of BERU. $3.3 million
of the amortization recognized in the second quarter of 2008 is
for the immediate write off of in process R&D and order
backlog, the remaining $4.7 million increase is
amortization on other intangible assets. The Company also
recorded an increase in bad debt expense of $2.7 million in
2008 related to a decline in the financial condition of certain
customers.
Research and development (R&D) is a major
component of our SG&A expenses. R&D spending, net of
customer reimbursements, was $205.7 million, or 3.9% of
sales in 2008, compared to $210.8 million, or 4.0% of sales
in 2007, and $187.7 million, or 4.1% of sales in 2006. We
currently intend to continue to increase our spending in
R&D, although the growth rate in the future may not
necessarily match the rate of our sales growth. We also intend
to continue to invest in a number of cross-business R&D
programs, as well as a number of other key programs, all of
which are necessary for short and long-term growth. Our current
long-term expectation for R&D spending is approximately
4.0% of sales. We intend to maintain our commitment to R&D
spending while continuing to focus on controlling other
SG&A costs.
Restructuring expense of $127.5 million in 2008 and
$84.7 million in 2006 was in response to declines in global
customer production levels, customer restructurings and a
subsequent evaluation of our headcount levels in North America,
Europe and Asia (in 2008 only) and our long-term capacity needs.
On July 31, 2008, the Company announced a restructuring of
its operations to align ongoing operations with a continuing,
fundamental market shift in the auto industry. As a continuation
of the Companys third quarter restructuring, on
December 11, 2008, the Company announced plans for
additional restructuring actions. As a
29
result of these third and fourth quarter restructuring actions,
the Company has reduced its North American workforce by
approximately 2,400 people, or 33%; its European workforce
by approximately 1,600 people, or 18%; and its Asian
workforce by approximately 400 people, or 17%. The
restructuring expense recognized for employee termination
benefits is $54.6 million, of which $10.3 million was
paid out in the third and fourth quarters of 2008. The remaining
liability will be paid out by the middle of 2010. In addition to
employee termination costs, the Company recorded
$72.9 million of asset impairment charges related to the
North American and European restructuring. The combined
restructuring expenses of $127.5 million are broken out by
segment as follows: Engine $85.3 million, Drivetrain
$40.9 million and Corporate $1.3 million. Refer to
Note 19, Restructuring of the Notes to the
Consolidated Financial Statements in Item 8 of this report
for further discussion.
On September 22, 2006, the Company announced the reduction
of its North American workforce by approximately
850 people, or 13%, spread across its 19 operations in the
U.S., Canada and Mexico. This third quarter reduction of the
North American workforce addressed an immediate need to adjust
employment levels to meet customer restructurings and
significantly lower production schedules going forward. In
addition to employee related costs of $6.7 million, the
Company recorded $4.8 million of asset impairment charges
related to the North American restructuring. The third quarter
restructuring expenses of $11.5 million broken out by
segment were as follows: Engine $7.3 million, Drivetrain
$3.6 million and Corporate $0.6 million.
During the fourth quarter 2006, the Company evaluated the
competitiveness of its North American facilities, as well as its
long-term capacity needs. As a result, the Company will be
closing the drivetrain plant in Muncie, Indiana and has adjusted
the carrying values of other assets, primarily related to its
four-wheel drive transfer case product line. Production activity
at the Muncie facility is scheduled to cease no later than the
expiration of the current labor contract in April 24, 2009.
As a result of the fourth quarter restructuring, the Company
recorded employee related costs of $14.8 million, asset
impairments of $51.6 million and pension curtailment
expense of $6.8 million. The fourth quarter restructuring
expenses of $73.2 million broken out by segment were as
follows: Engine $5.9 million and Drivetrain
$67.3 million.
Other income was $(3.1) million, $(6.8) million
and $(7.5) million in 2008, 2007 and 2006, respectively.
The 2008 income was comprised primarily of interest income,
offset by the realization of a loss on the sale of a product
line and other asset disposals. The 2007 income was comprised
primarily of interest income. The 2006 income was comprised
primarily of a $(4.8) million gain from a previous
divestiture and $(3.2) million of interest income.
Equity in affiliates earnings, net of tax was
$38.4 million, $40.3 million and $35.9 million in
2008, 2007 and 2006, respectively. This line item is primarily
driven by the results of our 50% owned Japanese joint venture,
NSK-Warner, and our 32.6% owned Indian joint venture, Turbo
Energy Limited (TEL). For more discussion of
NSK-Warner, see Note 6 of the Consolidated Financial
Statements.
Interest expense and finance charges were
$38.8 million, $34.7 million and $40.2 million in
2008, 2007 and 2006, respectively. The increase in 2008 expense
over 2007 expense was primarily due to costs related to
BERUs DPTA. The decrease in 2007 expense over 2006 expense
was primarily due to reduced debt levels.
The provision for income taxes resulted in an effective
tax rate for 2008 of 237.9% compared with rates of 26.5% in 2007
and 12.0% in 2006. The effective tax rate of 237.9% for 2008
differs from the U.S. statutory rate primarily due to the
non-deductibility of the $156.8 million impairment charge
in 2008 related to BERU goodwill; a reduction in
U.S. income; foreign rates, which differ from those in the
U.S.; the realization of certain business tax credits including
R&D and foreign tax credits and favorable permanent
differences between book and tax treatment for items, including
equity in affiliates earnings. If the effects of tax
accrual changes and the Companys third quarter
$13.5 million valuation allowance are not taken into
account, the Companys effective tax rate associated with
its on-going business operations was 23.0%. This rate was lower
than the 2007 tax rate for on-going operations of 27.1%
primarily due to the decline in U.S. earnings.
Minority interest, net of tax of $16.3 million
decreased by $11.7 million from 2007 and by
$10.0 million from 2006. The decrease is primarily related
to the Companys DPTA with BERU, giving BorgWarner full
control of BERU.
30
LIQUIDITY
AND CAPITAL RESOURCES
Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
Notes payable
|
|
$
|
183.8
|
|
|
$
|
63.7
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
136.9
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
459.6
|
|
|
|
572.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
780.3
|
|
|
|
636.3
|
|
|
|
22.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiaries
|
|
|
31.5
|
|
|
|
117.9
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,006.0
|
|
|
|
2,321.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
2,817.8
|
|
|
$
|
3,075.3
|
|
|
|
(8.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to capital ratio
|
|
|
27.7
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company intends to settle the current portion of
long-term
debt (due February 17, 2009) of $136.9 million with
cash on hand, cash from operations and affiliate dividend
receipts. |
The $144.0 million increase in debt was primarily due to
the $133.6 million acquisition of additional shares of BERU.
Stockholders equity decreased by $315.1 million in
2008 as follows:
|
|
|
|
|
millions of dollars
|
|
|
|
|
Balance, January 1, 2008
|
|
$
|
2,321.1
|
|
Net loss
|
|
|
(35.6
|
)
|
Currency translation and hedged instruments
|
|
|
(136.9
|
)
|
Defined benefit post employment plans
|
|
|
(74.7
|
)
|
Treasury stock purchases, net of options exercised
|
|
|
(40.9
|
)
|
Dividend payments
|
|
|
(51.1
|
)
|
Other
|
|
|
24.1
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
2,006.0
|
|
|
|
|
|
|
The currency translation component of other comprehensive income
decreased in 2008 primarily due to the weakening of the Euro,
Korean Won and British Pound in relation to the U.S. Dollar.
Operating
Activities
Net cash provided by operating activities was
$400.8 million, $603.5 million and $442.1 million
in 2008, 2007 and 2006, respectively. The $202.7 million
decrease in 2008 from 2007 was primarily due to lower earnings
and increased working capital needs. The $161.4 million
increase in 2007 from 2006 was primarily due to higher earnings
and improved working capital usage. The $400.8 million of
net cash provided by operating activities in 2008 consists of a
net loss of $35.6 million, increased for non-cash charges
of $530.7 million and a $94.3 million decrease in net
operating assets and liabilities. Non-cash charges are primarily
comprised of $286.8 million in depreciation and
amortization expense and a $156.8 million goodwill
impairment charge.
Accounts receivable and accounts payable and accrued expenses
decreased a total of $163.9 million and
$195.6 million, respectively, excluding the impact of
currency, due to lower business levels, particularly in
North America and Europe. Certain of our European customers
tend to have longer payment terms than our North American
customers. Inventory increased by $26.3 million excluding
the impact of currency, while our full year average inventory
turns decreased to 9.8 times from 10.5 in 2007.
31
Investing
Activities
Net cash used in investing activities was $485.1 million,
$368.0 million and $341.1 million in 2008, 2007 and
2006, respectively. Capital expenditures, including tooling
outlays (capital spending) of $369.7 million in
2008, or 7.0% of sales, increased $75.8 million over the
2007 level of $293.9 million, or 5.5% of sales. Selective
capital spending remains an area of focus for us, both in order
to support our book of new business and for cost reduction and
other purposes. Heading into 2009, we plan to continue to spend
capital to support the launch of our new applications and for
cost reductions and productivity improvement projects, but at
levels considerably lower than 2008.
In 2008, the Company purchased approximately 1.34 million
BERU shares, at a cost of $133.6 million. See Note 20,
Recent Transactions for further information.
The Company acquired approximately 12.8% of additional BERU
shares in 2007 for $138.8 million, including transaction
fees.
In 2006, the Company acquired the ETEC product lines from Eaton
for $63.7 million, net of cash acquired.
Financing
Activities and Liquidity
Liquidity: The Company had $103.4 million of cash on
hand at December 31, 2008. The Company has a multi-currency
revolving credit facility, which provides for borrowings up to
$600 million through July 22, 2009. We intend to
extend or renew our existing multi-currency credit facility with
terms sufficient for our ongoing financing needs before
July 22, 2009. However, if the Company is unable to
negotiate a new credit facility or similar access to credit
lines, it could adversely affect the Companys ability to
operate. At December 31, 2008 and December 31, 2007
there were no outstanding borrowings under the facility. The
credit agreement is subject to the usual terms and conditions
applied by banks to an investment grade company. The two key
covenants of the credit agreement are a net worth test and a
debt compared to EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) test. The Company was in
compliance with all covenants at December 31, 2008 and
expects to be compliant in future periods. In addition to the
credit facility, the Company has $750 million available
under a universal shelf registration statement on file with the
Securities and Exchange Commission under which a variety of debt
and equity instruments could be issued. The Company also has
access to the commercial paper market through a $50 million
accounts receivable securitization facility, which is rolled
over annually. The current facility matures on April 25, 2009.
From a credit quality perspective, the Company has an investment
grade credit rating of BBB from Standard & Poors
and Baa3 from Moodys. The current outlook from
Standard & Poors is negative and we are under
review for a potential further downgrade from Moodys. None
of the Companys debt agreements require accelerated
repayment in the event of a decrease in credit ratings.
The Companys significant contractual obligation payments
at December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
Total
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
After 2013
|
|
|
Other post employment benefits excluding pensions(a)
|
|
$
|
853.1
|
|
|
$
|
30.8
|
|
|
$
|
66.0
|
|
|
$
|
66.0
|
|
|
$
|
690.3
|
|
Unfunded pension plans(b)
|
|
|
61.6
|
|
|
|
5.4
|
|
|
|
9.8
|
|
|
|
11.4
|
|
|
|
35.0
|
|
Notes payable and long-term debt
|
|
|
782.7
|
|
|
|
320.7
|
|
|
|
8.1
|
|
|
|
4.4
|
|
|
|
449.5
|
|
Projected interest payments(c)
|
|
|
321.7
|
|
|
|
29.5
|
|
|
|
47.9
|
|
|
|
47.9
|
|
|
|
196.4
|
|
Non-cancelable operating leases(d)
|
|
|
65.9
|
|
|
|
24.3
|
|
|
|
16.3
|
|
|
|
13.6
|
|
|
|
11.7
|
|
Capital spending obligations
|
|
|
63.2
|
|
|
|
63.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory purchase obligations
|
|
|
13.2
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments(e)
|
|
|
56.7
|
|
|
|
56.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domination and Profit Transfer Agreement(f)
|
|
|
44.0
|
|
|
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental(g)
|
|
|
13.3
|
|
|
|
5.9
|
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,275.4
|
|
|
$
|
593.7
|
|
|
$
|
151.1
|
|
|
$
|
146.3
|
|
|
$
|
1,384.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
(a) |
|
Other post employment benefits excluding pensions include
anticipated future payments to cover retiree medical and life
insurance benefits. See Note 12 to the Consolidated
Financial Statements for disclosures related to the
Companys pension and other post employment benefits. |
|
(b) |
|
Amount contained in After 2013 column includes
estimated payments through 2018. Since the timing and amount of
payments for funded defined benefit pension plans are not
certain for future years, such payments have been excluded from
this table. The Company expects to contribute a total of
$10 million to $20 million into all defined benefit
pension plans during 2009. See Note 12 to the Consolidated
Financial Statements for disclosures related to the
Companys pension and other post employment benefits. |
|
(c) |
|
Projection is based upon actual fixed rates w here appropriate,
and a projected floating rate for the variable rate portion of
the total debt portfolio. The floating rate projection is based
upon current market conditions and rounded to the nearest 50th
basis point (0.50%), w hich is 4.5% for this purpose. Projection
is also based upon debt being redeemed upon maturity. |
|
(d) |
|
2009 includes $7.7 million for the guaranteed residual
value of production equipment w ith a lease that expires in
2009. Please see Note 16 to the Consolidated Financial
Statements for details concerning this lease. |
|
(e) |
|
See Note 4 to the Consolidated Financial Statements for
disclosures related to the Companys income taxes. |
|
(f) |
|
See Note 20 to the Consolidated Financial Statements for
disclosures related to the Companys Domination and Profit
Transfer Agreement. |
|
(g) |
|
See Note 15 to the Consolidated Financial Statements for
disclosures related to the Companys environmental
liability. |
We believe that the combination of cash from operations, cash
balances, available credit facilities and the shelf registration
will be sufficient to satisfy our cash needs for our current
level of operations and our planned operations for the
foreseeable future. We will continue to balance our needs for
internal growth, external growth, debt reduction, dividends and
share repurchase.
Financing Activities: Net debt increases were
$107.5 million in 2008 excluding the impact of currency
translation. Net debt reductions were $101.7 million in
2007 excluding the impact of currency translation. Proceeds from
stock options exercised, net of tax benefit were
$17.1 million, $46.3 million and $27.1 million in
2008, 2007 and 2006, respectively. The Company paid dividends to
BorgWarner stockholders of $51.1 million,
$39.4 million and $36.7 million in 2008, 2007 and
2006, respectively. The Company had treasury stock purchases of
$55.9 million and $47.0 million in 2008 and 2007,
respectively.
Off
Balance Sheet Arrangements
As of December 31, 2008, the accounts receivable
securitization facility was sized at $50 million and has
been in place with its current funding partner since January
1994. This facility sells accounts receivable without recourse.
The Company has certain leases that are recorded as operating
leases. Types of operating leases include leases on the
headquarters facility, an airplane, vehicles, and certain office
equipment. The Company also has a lease obligation for
production equipment at one of its facilities. The total
expected future cash outlays for all lease obligations at the
end of 2008 is $65.9 million. See Note 16 to the
Consolidated Financial Statements for more information on
operating leases, including future minimum payments.
The Company has guaranteed the residual values of certain leased
machinery and equipment at one of its facilities. The guarantees
extend through the maturity of the underlying lease, which is in
September 2010. In the event the Company exercises its option
not to purchase the machinery and equipment, the Company has
guaranteed a residual value of $7.7 million. The Company
has accrued $4.1 million as a loss on this guarantee, which
is expected to be paid in 2009.
33
Pension
and Other Post Employment Benefits
The Companys policy is to fund its defined benefit pension
plans in accordance with applicable government regulations and
to make additional contributions when management deems it
appropriate. At December 31, 2008, all legal funding
requirements had been met. The Company contributed
$13.3 million to its defined benefit pension plans in 2008
and $12.4 million in 2007. The Company expects to
contribute a total of $10 million to $20 million in
2009.
The funded status of all pension plans was a net unfunded
position of $(253.5) million and $(136.5) million at
the end of 2008 and 2007, respectively. Of these amounts,
$(110.9) million and $(111.1) at the end of 2008 and 2007,
respectively, were related to plans in Germany, where there is
not a tax deduction allowed under the applicable regulations to
fund the plans, hence, the common practice is that they are
unfunded plans.
Other post employment benefits primarily consist of post
employment health care benefits for certain employees and
retirees of the Companys U.S. operations. The Company
funds these benefits as retiree claims are incurred. Other post
employment benefits had an unfunded status of
$(328.5) million at the end of 2008 and
$(373.1) million at the end of 2007. The unfunded levels
decreased due to an increase in the discount rate assumption and
changes in certain plan designs.
The Company believes it will be able to fund the requirements of
these plans through cash generated from operations or other
available sources of financing for the foreseeable future.
See Note 12 to the Consolidated Financial Statements for
more information regarding costs and assumptions for employee
retirement benefits.
OTHER
MATTERS
Contingencies
In the normal course of business the Company and its
subsidiaries are parties to various commercial and legal claims,
actions and complaints, including matters involving warranty
claims, intellectual property claims, general liability and
various other risks. See Notes 8 and 15 to the Consolidated
Financial Statements. It is not possible to predict with
certainty whether or not the Company and its subsidiaries will
ultimately be successful in any of these commercial and legal
matters or, if not, what the impact might be. The Companys
environmental and product liability contingencies are discussed
separately below. The Companys management does not expect
that the results in any of these commercial and legal claims,
actions and complaints will have a material adverse effect on
the Companys results of operations, financial position or
cash flows.
Litigation
Outcome
In January 2006, BorgWarner Diversified Transmission Products
Inc (DTP), a subsidiary of the Company, filed a
declaratory judgment action in United States District Court,
Southern District of Indiana (Indianapolis Division) against the
United Automobile, Aerospace, and Agricultural Implements
Workers of America (UAW) Local No. 287 and
Gerald Poor, individually and as the representative of a
defendant class. DTP sought the Courts affirmation that
DTP did not violate the Labor-Management Relations Act or the
Employee Retirement Income Security Act by unilaterally amending
certain medical plans effective April 1, 2006 and
October 1, 2006, prior to the expiration of the current
collective bargaining agreements. On September 10, 2008,
the Court found that DTPs reservation of the right to make
such amendments reducing the level of benefits provided to
retirees was limited by its collectively bargained health
insurance agreement with the UAW, which does not expire until
April 24, 2009. Thus, the amendments were untimely. In 2008
the Company recorded a charge of $4.0 million as a result
of the Courts decision.
The Company has communicated its plan to reduce the level of
benefits provided to the retirees to make them comparable to
other Company retiree benefit plans. The change will be
effective following expiration of the health insurance agreement
in April 24, 2009.
34
Environmental
The Company and certain of its current and former direct and
indirect corporate predecessors, subsidiaries and divisions have
been identified by the United States Environmental Protection
Agency and certain state environmental agencies and private
parties as potentially responsible parties (PRPs) at
various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act
(Superfund) and equivalent state laws and, as such,
may presently be liable for the cost of
clean-up and
other remedial activities at 35 such sites. Responsibility for
clean-up and
other remedial activities at a Superfund site is typically
shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or
in the aggregate, will have a material adverse effect on its
results of operations, financial position, or cash flows.
Generally, this is because either the estimates of the maximum
potential liability at a site are not large or the liability
will be shared with other PRPs, although no assurance can be
given with respect to the ultimate outcome of any such matter.
Based on information available to the Company (which in most
cases includes: an estimate of allocation of liability among
PRPs; the probability that other PRPs, many of whom are large,
solvent public companies, will fully pay the cost apportioned to
them; currently available information from PRPs
and/or
federal or state environmental agencies concerning the scope of
contamination and estimated remediation and consulting costs;
remediation alternatives; and estimated legal fees), the Company
has established an accrual for indicated environmental
liabilities with a balance at December 31, 2008 of
$11.9 million. The Company has accrued amounts that do not
exceed $3.4 million related to any individual site and we
do not believe that the costs related to any of these sites will
have a material adverse effect on the Companys results of
operations, cash flows or financial condition. The Company
expects to pay out substantially all of the amounts accrued for
environmental liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the
Company agreed to indemnify the buyer and Kuhlman Electric for
certain environmental liabilities, then unknown to the Company,
relating to certain operations of Kuhlman Electric that pre-date
the Companys 1999 acquisition of Kuhlman Electric. During
2000, Kuhlman Electric notified the Company that it discovered
potential environmental contamination at its Crystal Springs,
Mississippi plant while undertaking an expansion of the plant.
The Company is continuing to work with the Mississippi
Department of Environmental Quality and Kuhlman Electric to
investigate and remediate to the extent necessary, historical
contamination at the plant and surrounding area. Kuhlman
Electric and others, including the Company, were sued in
numerous related lawsuits, in which multiple claimants alleged
personal injury and property damage. In 2005, the Company and
other defendants entered into settlements that resolved
approximately 99% of the then known personal injury and property
damage claims relating to the alleged environmental
contamination. Those settlements involved payments by the
Company of $28.5 million in the second half of 2005 and
$15.7 million in the first quarter of 2006, in exchange
for, among other things, dismissal with prejudice of these
lawsuits.
In December 2007, a lawsuit was filed against Kuhlman Electric
and others, including the Company, on behalf of approximately
209 plaintiffs, alleging personal injury relating to the alleged
environmental contamination. In August 2008, two similar
lawsuits were filed against Kuhlman Electric and others,
including the Company, on behalf of approximately 100 plaintiffs
and 30 plaintiffs, respectively, alleging personal injury
related to the alleged environmental contamination. Given the
early stage of the litigation, the Company cannot make any
predictions as to the outcome, but its current intent is to
vigorously defend against the suits.
Conditional
Asset Retirement Obligations
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143 (FIN 47), which requires the
Company to recognize legal obligations to perform asset
retirements in which the timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. Certain
government regulations require the removal and disposal of
asbestos from an existing facility at the time the facility
undergoes major renovations or is demolished. The liability
exists because the facility will not last forever, but it is
35
conditional on future renovations (even if there are no
immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government
regulations require the removal or closure of underground
storage tanks (USTs) and above ground storage tanks
(ASTs) when their use ceases, the disposal of
polychlorinated biphenyl (PCB) transformers and
capacitors when their use ceases, and the disposal of used
furnace bricks and liners, and lead-based paint in conjunction
with facility renovations or demolition. The Company currently
has 32 manufacturing locations that have been identified as
containing these items. The fair value to remove and dispose of
this material has been estimated and recorded at
$1.4 million as of December 31, 2008 and
$1.0 million as of December 31, 2007.
Product
Liability
Like many other industrial companies who have historically
operated in the U.S., the Company (or parties the Company is
obligated to indemnify) continues to be named as one of many
defendants in asbestos-related personal injury actions. We
believe that the Companys involvement is limited because,
in general, these claims relate to a few types of automotive
friction products that were manufactured many years ago and
contained encapsulated asbestos. The nature of the fibers, the
encapsulation and the manner of use lead the Company to believe
that these products are highly unlikely to cause harm. As of
December 31, 2008 and 2007, the Company had approximately
27,000 and 42,000 pending asbestos-related product liability
claims, respectively. Of the 27,000 outstanding claims at
December 31, 2008, approximately 16,000 are pending in just
three jurisdictions, where significant tort and judicial reform
activities are underway.
The Companys policy is to aggressively defend against
these lawsuits and the Company has been successful in obtaining
dismissal of many claims without any payment. The Company
expects that the vast majority of the pending asbestos-related
product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment
being made by the Company or its insurers. In 2008, of the
approximately 17,500 claims resolved, only 210 (1.2%) resulted
in any payment being made to a claimant by or on behalf of the
Company. In 2007, of the approximately 4,400 claims resolved,
only 194 (4.4%) resulted in any payment being made to a claimant
by or on behalf of the Company.
Prior to June 2004, the settlement and defense costs associated
with all claims were covered by the Companys primary layer
insurance coverage, and these carriers administered, defended,
settled and paid all claims under a funding arrangement. In June
2004, primary layer insurance carriers notified the Company of
the alleged exhaustion of their policy limits. This led the
Company to access the next available layer of insurance
coverage. Since June 2004, secondary layer insurers have paid
asbestos-related litigation defense and settlement expenses
pursuant to a funding arrangement. To date, the Company has paid
$50.1 million in defense and indemnity in advance of
insurers reimbursement and has received $14.2 million
in cash from insurers. The outstanding balance of
$35.9 million is expected to be fully recovered. Timing of
the recovery is dependent on final resolution of the declaratory
judgment action referred to below. At December 31, 2007,
insurers owed $20.6 million in association with these
claims.
At December 31, 2008, the Company has an estimated
liability of $34.7 million for future claims resolutions,
with a related asset of $34.7 million to recognize the
insurance proceeds receivable by the Company for estimated
losses related to claims that have yet to be resolved. Insurance
carrier reimbursement of 100% is expected based on the
Companys experience, its insurance contracts and decisions
received to date in the declaratory judgment action referred to
below. At December 31, 2007, the comparable value of the
insurance receivable and accrued liability was
$39.6 million.
36
The amounts recorded in the Consolidated Balance Sheets related
to the estimated future settlement of existing claims are as
follows:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Prepayments and other current assets
|
|
$
|
22.1
|
|
|
$
|
20.1
|
|
Other non-current assets
|
|
|
12.6
|
|
|
|
19.5
|
|
|
|
|
|
|
|
|
|
|
Total insurance receivable
|
|
$
|
34.7
|
|
|
$
|
39.6
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
22.1
|
|
|
$
|
20.1
|
|
Other non-current liabilities
|
|
|
12.6
|
|
|
|
19.5
|
|
|
|
|
|
|
|
|
|
|
Total accrued liability
|
|
$
|
34.7
|
|
|
$
|
39.6
|
|
|
|
|
|
|
|
|
|
|
The Company cannot reasonably estimate possible losses, if any,
in excess of those for which it has accrued, because it cannot
predict how many additional claims may be brought against the
Company (or parties the Company has an obligation to indemnify)
in the future, the allegations in such claims, the possible
outcomes, or the impact of tort reform legislation that may be
enacted at the State or Federal levels.
A declaratory judgment action was filed in January 2004 in the
Circuit Court of Cook County, Illinois by Continental Casualty
Company and related companies (CNA) against the
Company and certain of its other historical general liability
insurers. CNA provided the Company with both primary and
additional layer insurance, and, in conjunction with other
insurers, is currently defending and indemnifying the Company in
its pending asbestos-related product liability claims. The
lawsuit seeks to determine the extent of insurance coverage
available to the Company including whether the available limits
exhaust on a per occurrence or an
aggregate basis, and to determine how the applicable
coverage responsibilities should be apportioned. On
August 15, 2005, the Court issued an interim order
regarding the apportionment matter. The interim order has the
effect of making insurers responsible for all defense and
settlement costs pro rata to
time-on-the-risk,
with the pro-ration method to hold the insured harmless for
periods of bankrupt or unavailable coverage. Appeals of the
interim order were denied. However, the issue is reserved for
appellate review at the end of the action. In addition to the
primary insurance available for asbestos-related claims, the
Company has substantial additional layers of insurance available
for potential future asbestos-related product claims. As such,
the Company continues to believe that its coverage is sufficient
to meet foreseeable liabilities.
Although it is impossible to predict the outcome of pending or
future claims or the impact of tort reform legislation that may
be enacted at the State or Federal levels, due to the
encapsulated nature of the products, the Companys
experiences in aggressively defending and resolving claims in
the past, and the Companys significant insurance coverage
with solvent carriers as of the date of this filing, management
does not believe that asbestos-related product liability claims
are likely to have a material adverse effect on the
Companys results of operations, cash flows or financial
condition.
CRITICAL
ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity
with GAAP. In preparing these financial statements, management
has made its best estimates and judgments of certain amounts
included in the financial statements, giving due consideration
to materiality. Critical accounting policies are those that are
most important to the portrayal of the Companys financial
condition and results of operations. These policies require
managements most difficult, subjective or complex
judgments in the preparation of the financial statements and
accompanying notes. Management makes estimates and assumptions
about the effect of matters that are inherently uncertain,
relating to the reporting of assets, liabilities, revenues,
expenses and the disclosure of contingent assets and
liabilities. Our most critical accounting policies are discussed
below.
37
Revenue
Recognition
The Company recognizes revenue when title and risk of loss pass
to the customer, which is usually upon shipment of product.
Although the Company may enter into long-term supply agreements
with its major customers, each shipment of goods is treated as a
separate sale and the price is not fixed over the life of the
agreements.
Impairment
of Long-Lived Assets
The Company periodically reviews the carrying value of its
long-lived assets, whether held for use or disposal, including
other intangible assets, when events and circumstances warrant
such a review. This review is performed using estimates of
future cash flows. If the carrying value of a long-lived asset
is considered impaired, an impairment charge is recorded for the
amount by which the carrying value of the long-lived asset
exceeds its fair value. Management believes that the estimates
of future cash flows and fair value assumptions are reasonable;
however, changes in assumptions underlying these estimates could
affect the evaluations. Significant judgments and estimates used
by management when evaluating long-lived assets for impairment
include: (i) an assessment as to whether an adverse event
or circumstance has triggered the need for an impairment review;
and (ii) undiscounted future cash flows generated by the
asset. The Company recognized $72.9 million and
$56.4 million in impairment of long-lived assets as part of
restructuring expenses in 2008 and 2006, respectively.
See Note 19 to the Consolidated Financial Statements for
more information regarding the Companys 2006 and 2008
impairment of long-lived assets.
Goodwill
The Company annually reviews its goodwill for impairment in the
fourth quarter of each year for all of its reporting units, or
when events and circumstances warrant such a review. This review
utilizes the two-step impairment test required under
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangibles, and requires us to make
significant assumptions and estimates about the extent and
timing of future cash flows, discount rates and growth rates.
The cash flows are estimated over a significant future period of
time, which makes those estimates and assumptions subject to an
even higher degree of uncertainty. We also utilize market
valuation models and other financial ratios, which require us to
make certain assumptions and estimates regarding the
applicability of those models to our assets and businesses. We
believe that the assumptions and estimates used to determine the
estimated fair values of each of our reporting units are
reasonable. However, different assumptions could materially
affect the estimated fair value. The goodwill impairment test
was performed in December and September 2008, December 2007 and
December 2006. The Company recognized goodwill impairment of
$156.8 million in the Engine segment in 2008 and
$0.2 million in the Drivetrain segment in 2006. No goodwill
impairment was recorded in 2007.
See Note 7 to the Consolidated Financial Statements for
more information regarding goodwill.
Environmental
Accrual
We work with outside experts to determine a range of potential
liability for environmental sites. The ranges for each
individual site are then aggregated into a loss range for the
total accrued liability. Managements estimate of the loss
range for environmental liability, including conditional asset
retirement obligations, for 2008 is between $12.4 million
and $26.1 million. We record an accrual at the most
probable amount within the range unless one cannot be
determined; in which case we record the accrual at the low end
of the range. At the end of 2008, our total accrued
environmental liability was $13.3 million, which includes
our conditional asset retirement obligation under FIN 47 of
$1.4 million.
See Note 15 to the Consolidated Financial Statements for
more information regarding environmental accrual.
38
Product
Warranty
The Company provides warranties on some of its products. The
warranty terms are typically from one to three years. Provisions
for estimated expenses related to product warranty are made at
the time products are sold. These estimates are established
using historical information about the nature, frequency, and
average cost of warranty claim settlements; as well as product
manufacturing and industry developments and recoveries from
third parties. Management actively studies trends of warranty
claims and takes action to improve product quality and minimize
warranty claims. Management believes that the warranty accrual
is appropriate; however, actual claims incurred could differ
from the original estimates, requiring adjustments to the
accrual. The accrual is represented in both current and
non-current liabilities on the balance sheet.
See Note 8 to the Consolidated Financial Statements for
more information regarding product warranty.
Other
Loss Accruals and Valuation Allowances
The Company has numerous other loss exposures, such as customer
claims, workers compensation claims, litigation, and
recoverability of assets. Establishing loss accruals or
valuation allowances for these matters requires the use of
estimates and judgment in regard to the risk exposure and
ultimate realization. We estimate losses under the programs
using consistent and appropriate methods; however, changes to
our assumptions could materially affect our recorded accrued
liabilities for loss or asset valuation allowances.
Pension
and Other Post Employment Defined Benefits
The Company provides post employment defined benefits to a
number of its current and former employees. Costs associated
with post employment defined benefits include pension and post
employment health care expenses for employees, retirees and
surviving spouses and dependents. The Companys employee
defined benefit pension and post employment health care expenses
are dependent on managements assumptions used by actuaries
in calculating such amounts. These assumptions include discount
rates, health care cost trend rates, inflation, long-term return
on plan assets, retirement rates, mortality rates and other
factors. Health care cost trend assumptions are developed based
on historical cost data, the near-term outlook, and an
assessment of likely long-term trends. The inflation assumption
is based on an evaluation of external market indicators.
Retirement and mortality rates are based primarily on actual
plan experience. The Company reviews its actuarial assumptions
on an annual basis and makes modifications to the assumptions
based on current rates and trends when appropriate. The effects
of the modifications are recorded currently or amortized over
future periods in accordance with GAAP.
The Companys approach to establishing the discount rate is
based upon the market yields of high-quality corporate bonds,
with appropriate consideration of each plans defined
benefit payment terms and duration of the liabilities. The
discount rate assumption is typically rounded up or down to the
nearest 25 basis points for each plan. As a sensitivity
measure for the Companys pension plans, a decrease of
25 basis points to the discount rate would increase the
Companys 2009 expense by approximately $0.9 million.
As for the Companys other post employment benefit plans, a
decrease of 25 basis points to the discount rate would
increase the Companys 2009 expense by approximately
$0.3 million.
The Company determines its expected return on plan asset
assumptions by evaluating estimates of future market returns and
the plans asset allocation. The Company also considers the
impact of active management of the plans invested assets.
The Companys expected return on assets assumption reflects
the asset allocation of each plan. For 2009, the Company is
changing its expected return on U.S. plan assets to 7.50%
from 8.75% to reflect adjustments made to its targeted asset
allocations. For sensitivity purposes, a 25 basis point
decrease in the long-term return on assets would increase the
2009 pension expense by approximately $0.8 million.
The Company determines its health care inflation rate for its
other post employment benefit plans by evaluating the
circumstances surrounding the plan design, recent experience and
health care economics. For sensitivity purposes, a one
percentage point increase in the assumed health care cost trend
would increase the
39
Companys projected benefit obligation by
$18.9 million at December 31, 2008, and would increase
the 2009 expense by $1.4 million.
Based on the information provided by its independent actuaries
and other relevant sources, the Company believes that the
assumptions used are reasonable; however, changes in these
assumptions, or experience different from that assumed, could
impact the Companys financial position, results of
operations, or cash flows.
See Note 12 to the Consolidated Financial Statements for
more information regarding costs and assumptions for employee
retirement benefits.
Income
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company
records a valuation allowance that primarily represents foreign
operating and other loss carryforwards for which utilization is
uncertain. Management judgment is required in determining the
Companys provision for income taxes, deferred tax assets
and liabilities and the valuation allowance recorded against the
Companys net deferred tax assets. In calculating the
provision for income taxes on an interim basis, the Company uses
an estimate of the annual effective tax rate based upon the
facts and circumstances known at each interim period. In
determining the need for a valuation allowance, the historical
and projected financial performance of the operation recording
the net deferred tax asset is considered along with any other
pertinent information. Since future financial results may differ
from previous estimates, periodic adjustments to the
Companys valuation allowance may be necessary.
The Company is subject to income taxes in the U.S. and
numerous
non-U.S. jurisdictions.
Significant judgment is required in determining our worldwide
provision for income taxes and recording the related assets and
liabilities. In the ordinary course of our business, there are
many transactions and calculations where the ultimate tax
determination is less than certain. The Company is regularly
under audit by the various applicable tax authorities. Accruals
for income tax contingencies are provided for in accordance with
the requirements of FASB interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109. The Companys federal
and certain state income tax returns and certain
non-U.S. income
tax returns are currently under various stages of audit by
applicable tax authorities. Although the outcome of tax audits
is always uncertain, management believes that it has appropriate
support for the positions taken on its tax returns and that its
annual tax provisions included amounts sufficient to pay
assessments, if any, which may be proposed by the taxing
authorities. At December 31, 2008, the Company has recorded
a liability for its best estimate of the probable loss on
certain of its tax positions, which is included in other
non-current liabilities. Nonetheless, the amounts ultimately
paid, if any, upon resolution of the issues raised by the taxing
authorities may differ materially from the amounts accrued for
each year.
See Note 4 to the Consolidated Financial Statements for
more information regarding income taxes.
New
Accounting Pronouncements
In June 2006, the FASB issued interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109 (FIN 48).
The interpretation prescribes a consistent recognition threshold
and measurement attribute, as well as clear criteria for
subsequently recognizing, derecognizing and measuring such tax
positions for financial statement purposes. FIN 48 also
requires expanded disclosure with respect to the uncertainty in
income taxes. The Company adopted the provisions of FIN 48
on January 1, 2007. As a result of the implementation of
FIN 48, the Company recognized a $16.6 million
reduction to its January 1, 2007 retained earnings balance.
40
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(FAS 157). FAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. On
January 1, 2008, the Company partially adopted as required,
FAS 157. See Note 10 to the Consolidated Financial
Statements for more information regarding the implementation of
FAS 157.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(FAS 159). FAS 159 allows entities to
irrevocably elect to recognize most financial assets and
financial liabilities at fair value on an
instrument-by-instrument
basis. The stated objective of FAS 159 is to improve
financial reporting by giving entities the opportunity to elect
to measure certain financial assets and liabilities at fair
value in order to mitigate earnings volatility caused when
related assets and liabilities are measured differently.
FAS 159 is effective for the Company beginning with its
quarter ending March 31, 2008. The Company chose to not
make the election to adopt.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised 2007), Business
Combinations (FAS 141(R)). FAS 141(R)
establishes principles and requirements for recognizing
identifiable assets acquired, liabilities assumed,
noncontrolling interest in the acquiree, goodwill acquired in
the combination or the gain from a bargain purchase, and
disclosure requirements. Under this revised statement, all costs
incurred to effect an acquisition will be recognized separately
from the acquisition. Also, restructuring costs that are
expected but the acquirer is not obligated to incur will be
recognized separately from the acquisition. FAS 141(R) is
effective for the Company beginning with its quarter ending
March 31, 2009. The adoption of FAS 141(R) is not
expected to have a material impact on the Companys
consolidated financial position, results of operations or cash
flows.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests
in Consolidated Financial Statements
(FAS 160). FAS 160 requires that
ownership interests in subsidiaries held by parties other than
the parent are clearly identified. In addition, it requires that
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and
presented on the face of the income statement. FAS 160 is
effective for the Company beginning with its quarter ending
March 31, 2009. The adoption of FAS 160 is not
expected to have a material impact on the Companys
consolidated financial position, results of operations or cash
flows.
In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2
(FSP
FAS 157-2).
FSP
FAS 157-2
delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities that are recognized or
disclosed in the financial statements on a nonrecurring basis to
fiscal years beginning after November 15, 2008. Refer to
Note 10, Fair Value Measurements of the Notes
to the Consolidated Financial Statements for further discussion
of the Companys partial adoption of FSP
FAS 157-2.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative Instruments
and Hedging Activities (FAS 161). FAS 161
requires entities to provide enhanced disclosures about how and
why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and how
derivative instruments and related hedged items affect an
entitys financial position, financial performance, and
cash flows. FAS 161 is effective for the Company beginning
with its quarter ending March 31, 2009. The adoption of
FAS 161 is not expected to have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.
In December 2008, the FASB issued Staff Position 132(R)-1,
Employers Disclosures about Postretirement Benefit Plan
Assets (FAS 132(R)-1). FAS 132(R)-1
requires entities to provide enhanced disclosures about how
investment allocation decisions are made, the major categories
of plan assets, the inputs and valuation techniques used to
measure fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in
plan assets for the period, and significant concentrations of
risk within plan assets. FAS 132(R)-1 is effective for the
Company beginning with its year ending December 31, 2009.
The Company is currently assessing the potential impacts, if
any, on its consolidated financial statements.
41
In December 2008, the FASB issued Staff Position
140-4 and
Financial Interpretation 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities
(FSP 140-4
and FIN 46(R)-8).
FSP 140-4
and FIN 46(R)-8 requires entities to provide enhanced
disclosures about how an entity accounts for transfers of
financial assets, the nature of involvement, if any, after the
financial asset sale and the nature of any restrictions on
assets reported by an entity in its statement of financial
position that relates to a transferred financial asset,
including the carrying amounts of such assets. The Company has
adjusted its disclosures to be compliant with
FSP 140-4
and FIN
46(R)-8 at
December 31,2008.
QUALITATIVE
AND QUANTITIVE DISCLOSURE ABOUT MARKET RISK
The Companys primary market risks include fluctuations in
interest rates and foreign currency exchange rates. We are also
affected by changes in the prices of commodities used or
consumed in our manufacturing operations. Some of our commodity
purchase price risk is covered by supply agreements with
customers and suppliers. Other commodity purchase price risk is
addressed by hedging strategies, which include forward
contracts. The Company enters into derivative instruments only
with high credit quality counterparties and diversifies its
positions across such counterparties in order to reduce its
exposure to credit losses. We do not engage in any derivative
instruments for purposes other than hedging specific operating
risks.
We have established policies and procedures to manage
sensitivity to interest rate, foreign currency exchange rate and
commodity purchase price risk, which include monitoring the
level of exposure to each market risk.
Interest
Rate Risk
Interest rate risk is the risk that we will incur economic
losses due to adverse changes in interest rates. The Company
manages its interest rate risk by balancing its exposure to
fixed and variable rates while attempting to minimize its
interest costs. The Company selectively uses interest rate swaps
to reduce market value risk associated with changes in interest
rates (fair value hedges). At the end of 2008, the amount of net
debt with fixed interest rates was 38.5% of total debt,
including the impact of the interest rate swaps. Our earnings
exposure related to adverse movements in interest rates is
primarily derived from outstanding floating rate debt
instruments that are indexed to floating money market rates. A
10% increase or decrease in the average cost of our variable
rate debt would result in a change in pre-tax interest expense
for 2008 of approximately $2.1 million, and
$1.8 million in 2007.
We also measure interest rate risk by estimating the net amount
by which the fair value of all of our interest rate sensitive
assets and liabilities would be impacted by selected
hypothetical changes in market interest rates. Fair value is
estimated using a discounted cash flow analysis. Assuming a
hypothetical instantaneous 10% change in interest rates as of
December 31, 2008, the net fair value of these instruments
would increase by approximately $24 million if interest
rates decreased and would decrease by approximately
$22 million if interest rates increased. Our interest rate
sensitivity analysis assumes a constant shift in interest rate
yield curves. The model, therefore, does not reflect the
potential impact of changes in the relationship between
short-term and long-term interest rates. Interest rate
sensitivity at December 31, 2007, measured in a similar
manner, was slightly less than at December 31, 2008.
Foreign
Currency Exchange Rate Risk
Foreign currency risk is the risk that we will incur economic
losses due to adverse changes in foreign currency exchange
rates. Currently, our most significant currency exposures relate
to the British Pound, the Euro, the Hungarian Forint, the
Japanese Yen, and the South Korean Won. We mitigate our foreign
currency exchange rate risk principally by establishing local
production facilities and related supply chain participants in
the markets we serve, by invoicing customers in the same
currency as the source of the products and by funding some of
our investments in foreign markets through local currency loans
and cross currency swaps. Such
non-U.S. Dollar
debt was $495.8 million as of December 31, 2008 and
$413.5 million as of December 31, 2007. We also
monitor our foreign currency exposure in each country and
implement strategies to respond to changing
42
economic and political environments. In addition, the Company
periodically enters into forward currency contracts in order to
reduce exposure to exchange rate risk related to transactions
denominated in currencies other than the functional currency. As
of December 31, 2008, the Company was holding foreign
exchange derivatives with positive and negative fair market
values of $10.2 million and $(61.8) million,
respectively, of which $9.9 million in gains and
$(36.3) million in losses mature in less than one year. As
of December 31, 2008, $1.0 million in gains and
$(8.2) million in losses did not qualify for deferral.
Commodity
Price Risk
Commodity price risk is the possibility that we will incur
economic losses due to adverse changes in the cost of raw
materials used in the production of our products. Commodity
forward and option contracts are executed to offset our exposure
to the potential change in prices mainly for various non-ferrous
metals and natural gas consumption used in the manufacturing of
vehicle components. As of December 31, 2008, the Company
had forward and option commodity contracts with a total notional
value of $50.2 million. As of December 31, 2008, the
Company was holding commodity derivatives with positive and
negative fair market values of $2.1 million and
$(16.3) million, respectively, of which $1.0 million
in gains and $(15.1) million in losses mature in less than
one year.
Disclosure
Regarding Forward-Looking Statements
Statements contained in this Managements Discussion and
Analysis of Financial Condition and Results of Operations may
contain forward-looking statements as contemplated by the 1995
Private Securities Litigation Reform Act that are based on
managements current expectations, estimates and
projections. Words such as outlook,
expects, anticipates,
intends, plans, believes,
estimates, or variations of such words and similar
expressions are intended to identify such forward-looking
statements. Forward-looking statements are subject to risks and
uncertainties, many of which are difficult to predict and
generally beyond the control of the Company, which could cause
actual results to differ materially from those expressed,
projected or implied in or by the forward-looking statements.
Such risks and uncertainties include: fluctuations in domestic
or foreign automotive production, the continued use of outside
suppliers, fluctuations in demand for vehicles containing
BorgWarner products, general economic conditions, as well as
other risks detailed in the Companys filings with the
Securities and Exchange Commission, including the factors
identified under Item 1A, Risk Factors, in its
most recently filed annual report on
Form 10-K.
The Company does not undertake any obligation to update any
forward-looking statement.
43
REPORT OF
MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The information in this report is the responsibility of
management. BorgWarner Inc. and Consolidated Subsidiaries (the
Company) has in place reporting guidelines and
policies designed to ensure that the statements and other
information contained in this report present a fair and accurate
financial picture of the Company. In fulfilling this management
responsibility, we make informed judgments and estimates
conforming with accounting principles generally accepted in the
United States of America.
The accompanying Consolidated Financial Statements have been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm.
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting.
The Companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles in the United States of
America. The internal control process includes those policies
and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Any system of internal control, no matter how well designed, has
inherent limitations. Therefore, even those systems determined
to be effective may not prevent or detect misstatements and can
provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2008. In making this assessment, the
Companys management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework.
Based on managements assessment and those criteria, we
believe that, as of December 31, 2008, the Companys
internal control over financial reporting is effective.
Deloitte & Touche LLP, the Companys independent
registered public accounting firm, who audited the
Companys financial statements included in this Annual
Report, and has issued an attestation report appearing in
item 9A of
Form 10-K
on the effectiveness of the Companys internal control over
financial reporting as of December 31, 2008.
The Companys Audit Committee, composed entirely of
directors of the Company who are not employees, meets
periodically with the Companys management and independent
registered public accounting firm to review financial results
and procedures, internal financial controls and internal and
external audit plans and recommendations. In carrying out these
responsibilities, the Audit Committee and the independent
registered public accounting firm have unrestricted access to
each other with or without the presence of management
representatives.
/s/ Timothy M. Manganello
Chairman and Chief Executive Officer
/s/ Robin J. Adams
Executive Vice President,
Chief Financial Officer & Chief Administrative Officer
February 12, 2009
44
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Refer to Note 11, Financial Instruments of the
Notes to the Consolidated Financial Statements in Item 8 of
this report for information with respect to interest rate risk
and foreign currency exchange risk. Information with respect to
the levels of indebtedness subject to interest rate fluctuation
is contained in Note 9, Notes Payable and Long-Term
Debt to the Consolidated Financial Statements in
Item 8. Information with respect to the Companys
level of business outside the United States which is subject to
foreign currency exchange rate market risk is contained in
Note 21, Reporting Segments and Related
Information of the Notes to the Consolidated Financial
Statements in Item 8.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BorgWarner Inc.
Auburn Hills, Michigan
We have audited the accompanying consolidated balance sheets of
BorgWarner Inc. and Consolidated Subsidiaries (the
Company) as of December 31, 2008 and 2007, and
the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
BorgWarner Inc. and Consolidated Subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting in 2007
for income taxes as a result of adopting FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
and in 2006 for defined benefit pension and other
postretirement plans as a result of adopting
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 12, 2009 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
February 12, 2009
46
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
5,263.9
|
|
|
$
|
5,328.6
|
|
|
$
|
4,585.4
|
|
Cost of sales
|
|
|
4,425.4
|
|
|
|
4,378.7
|
|
|
|
3,735.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
838.5
|
|
|
|
949.9
|
|
|
|
849.9
|
|
Selling, general and administrative expenses
|
|
|
542.9
|
|
|
|
531.9
|
|
|
|
498.1
|
|
Restructuring expense
|
|
|
127.5
|
|
|
|
|
|
|
|
84.7
|
|
Goodwill impairment charge
|
|
|
156.8
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
(3.1
|
)
|
|
|
(6.8
|
)
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
14.4
|
|
|
|
424.8
|
|
|
|
274.6
|
|
Equity in affiliates earnings, net of tax
|
|
|
(38.4
|
)
|
|
|
(40.3
|
)
|
|
|
(35.9
|
)
|
Interest expense and finance charges
|
|
|
38.8
|
|
|
|
34.7
|
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
14.0
|
|
|
|
430.4
|
|
|
|
270.3
|
|
Provision for income taxes
|
|
|
33.3
|
|
|
|
113.9
|
|
|
|
32.4
|
|
Minority interest, net of tax
|
|
|
16.3
|
|
|
|
28.0
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(35.6
|
)
|
|
$
|
288.5
|
|
|
$
|
211.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic
|
|
$
|
(0.31
|
)*
|
|
$
|
2.49
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share diluted
|
|
$
|
(0.31
|
)*
|
|
$
|
2.45
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
116,007
|
|
|
|
116,002
|
|
|
|
114,806
|
|
Diluted
|
|
|
116,007
|
|
|
|
117,840
|
|
|
|
115,942
|
|
|
|
|
* |
|
The Company had a loss for the year ended December 31,
2008. As a result, diluted loss per share is the same as basic
loss per share in the period, as any dilutive securities would
reduce the loss per share. |
See Accompanying Notes to Consolidated Financial Statements.
47
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIAIRIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Cash
|
|
$
|
103.4
|
|
|
$
|
188.5
|
|
Marketable securities
|
|
|
|
|
|
|
14.6
|
|
Receivables, net
|
|
|
607.1
|
|
|
|
802.4
|
|
Inventories, net
|
|
|
451.2
|
|
|
|
447.6
|
|
Deferred income taxes
|
|
|
67.5
|
|
|
|
42.8
|
|
Prepayments and other current assets
|
|
|
79.0
|
|
|
|
84.4
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,308.2
|
|
|
|
1,580.3
|
|
Property, plant and equipment, net
|
|
|
1,586.2
|
|
|
|
1,609.1
|
|
Investments and advances
|
|
|
266.5
|
|
|
|
255.1
|
|
Goodwill
|
|
|
1,052.4
|
|
|
|
1,168.2
|
|
Other non-current assets
|
|
|
430.7
|
|
|
|
345.8
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,644.0
|
|
|
$
|
4,958.5
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Notes payable
|
|
$
|
183.8
|
|
|
$
|
63.7
|
|
Current portion of long-term debt
|
|
|
136.9
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
923.0
|
|
|
|
993.0
|
|
Income taxes payable
|
|
|
6.3
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,250.0
|
|
|
|
1,083.9
|
|
Long-term debt
|
|
|
459.6
|
|
|
|
572.6
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
Retirement-related liabilities
|
|
|
543.8
|
|
|
|
500.4
|
|
Other
|
|
|
353.1
|
|
|
|
362.6
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities
|
|
|
896.9
|
|
|
|
863.0
|
|
Minority interest in consolidated subsidiaries
|
|
|
31.5
|
|
|
|
117.9
|
|
Capital stock:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; authorized shares:
5,000,000; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; authorized shares:
150,000,000; issued shares: 2008, 117,699,542 and 2007,
117,206,709; outstanding shares: 2008, 115,532,372 and 2007,
116,128,572
|
|
|
1.2
|
|
|
|
1.2
|
|
Non-voting common stock, $0.01 par value; authorized
shares: 25,000,000; none issued and outstanding
|
|
|
|
|
|
|
|
|
Capital in excess of par value
|
|
|
977.6
|
|
|
|
943.4
|
|
Retained earnings
|
|
|
1,200.5
|
|
|
|
1,295.9
|
|
Accumulated other comprehensive income (loss)
|
|
|
(85.9
|
)
|
|
|
127.1
|
|
Common stock held in treasury, at cost: 2,167,170 shares in
2008 and 1,078,137 shares in 2007
|
|
|
(87.4
|
)
|
|
|
(46.5
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,006.0
|
|
|
|
2,321.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,644.0
|
|
|
$
|
4,958.5
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
48
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIAIRIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
OPERATING
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(35.6
|
)
|
|
$
|
288.5
|
|
|
$
|
211.6
|
|
Adjustments to reconcile net earnings (loss) to net cash flows
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash charges (credits) to operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and tooling amortization
|
|
|
259.7
|
|
|
|
243.1
|
|
|
|
239.1
|
|
Amortization of intangible assets and other
|
|
|
27.1
|
|
|
|
21.5
|
|
|
|
17.5
|
|
Restructuring expense, net of cash paid
|
|
|
115.9
|
|
|
|
|
|
|
|
79.4
|
|
Goodwill impairment charge
|
|
|
156.8
|
|
|
|
|
|
|
|
|
|
Gain on sales of businesses, net of tax
|
|
|
|
|
|
|
|
|
|
|
(3.6
|
)
|
Stock option compensation expense
|
|
|
21.2
|
|
|
|
16.3
|
|
|
|
12.7
|
|
Deferred income tax benefit
|
|
|
(78.3
|
)
|
|
|
(29.9
|
)
|
|
|
(46.4
|
)
|
Equity in affiliates earnings, net of dividends received,
minority interest and other
|
|
|
28.3
|
|
|
|
16.0
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings adjusted for non-cash charges to operations
|
|
|
495.1
|
|
|
|
555.5
|
|
|
|
549.1
|
|
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
163.9
|
|
|
|
(6.2
|
)
|
|
|
(57.4
|
)
|
Inventories
|
|
|
(26.3
|
)
|
|
|
(34.7
|
)
|
|
|
(32.7
|
)
|
Prepayments and other current assets
|
|
|
16.0
|
|
|
|
9.0
|
|
|
|
(25.2
|
)
|
Accounts payable and accrued expenses
|
|
|
(195.6
|
)
|
|
|
94.2
|
|
|
|
(8.1
|
)
|
Income taxes payable
|
|
|
(23.0
|
)
|
|
|
(15.1
|
)
|
|
|
0.5
|
|
Other non-current assets and liabilities
|
|
|
(29.3
|
)
|
|
|
0.8
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
400.8
|
|
|
|
603.5
|
|
|
|
442.1
|
|
INVESTING
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, including tooling outlays
|
|
|
(369.7
|
)
|
|
|
(293.9
|
)
|
|
|
(268.3
|
)
|
Net proceeds from asset disposals
|
|
|
5.7
|
|
|
|
17.3
|
|
|
|
3.6
|
|
Payments for businesses acquired, net of cash acquired
|
|
|
(141.2
|
)
|
|
|
(138.8
|
)
|
|
|
(63.7
|
)
|
Proceeds from sale of business
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
|
|
|
|
(13.0
|
)
|
|
|
(41.5
|
)
|
Proceeds from sales of marketable securities
|
|
|
14.6
|
|
|
|
60.4
|
|
|
|
28.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(485.1
|
)
|
|
|
(368.0
|
)
|
|
|
(341.1
|
)
|
FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in notes payable
|
|
|
114.8
|
|
|
|
(92.6
|
)
|
|
|
(27.7
|
)
|
Additions to long-term debt
|
|
|
|
|
|
|
20.0
|
|
|
|
289.1
|
|
Repayments of long-term debt
|
|
|
(7.3
|
)
|
|
|
(29.1
|
)
|
|
|
(296.6
|
)
|
Payment for purchase of treasury stock
|
|
|
(55.9
|
)
|
|
|
(47.0
|
)
|
|
|
|
|
Proceeds from stock options exercised, including the tax benefit
|
|
|
17.1
|
|
|
|
46.3
|
|
|
|
27.1
|
|
Dividends paid to BorgWarner stockholders
|
|
|
(51.1
|
)
|
|
|
(39.4
|
)
|
|
|
(36.7
|
)
|
Dividends paid to minority shareholders
|
|
|
(12.5
|
)
|
|
|
(17.5
|
)
|
|
|
(15.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
5.1
|
|
|
|
(159.3
|
)
|
|
|
(59.9
|
)
|
Effect of exchange rate changes on cash
|
|
|
(5.9
|
)
|
|
|
(11.0
|
)
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(85.1
|
)
|
|
|
65.2
|
|
|
|
33.6
|
|
Cash at beginning of year
|
|
|
188.5
|
|
|
|
123.3
|
|
|
|
89.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
103.4
|
|
|
$
|
188.5
|
|
|
$
|
123.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
44.4
|
|
|
$
|
42.7
|
|
|
$
|
45.0
|
|
Income taxes
|
|
|
122.0
|
|
|
|
91.6
|
|
|
|
83.8
|
|
Non-cash investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domination and Profit Transfer Agreement
|
|
|
44.0
|
|
|
|
|
|
|
|
|
|
Non-cash financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock performance plans
|
|
|
5.0
|
|
|
|
10.0
|
|
|
|
3.0
|
|
Restricted common stock for employees
|
|
|
9.0
|
|
|
|
1.6
|
|
|
|
|
|
Restricted common stock for non-employee directors
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.5
|
|
49
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIAIRIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Issued
|
|
|
Common
|
|
|
Issued
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Stock in
|
|
|
Common
|
|
|
Excess of
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Stock
|
|
|
Treasury
|
|
|
Stock
|
|
|
par Value
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2006
|
|
|
114,276,950
|
|
|
|
(7,968
|
)
|
|
$
|
0.6
|
|
|
$
|
827.6
|
|
|
$
|
(0.1
|
)
|
|
$
|
889.2
|
|
|
$
|
(73.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock incentive plans
|
|
|
994,372
|
|
|
|
|
|
|
|
|
|
|
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive stock plan
|
|
|
100,550
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net issuance of restricted stock, less amortization
|
|
|
22,696
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211.6
|
|
|
|
|
|
|
$
|
211.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS 158 incremental effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit post employment plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.1
|
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation and hedge instruments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91.4
|
|
|
|
91.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
115,394,568
|
|
|
|
(7,968
|
)
|
|
$
|
0.6
|
|
|
$
|
871.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
1,064.1
|
|
|
$
|
(60.3
|
)
|
|
$
|
322.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock split
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock incentive plans
|
|
|
1,725,339
|
|
|
|
19,083
|
|
|
|
|
|
|
|
45.7
|
|
|
|
0.6
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive stock plan
|
|
|
78,170
|
|
|
|
|
|
|
|
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net issuance of restricted stock, less amortization
|
|
|
8,632
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
(1,089,252
|
)
|
|
|
|
|
|
|
|
|
|
|
(47.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288.5
|
|
|
|
|
|
|
$
|
288.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit post employment plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.6
|
|
|
|
70.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation and hedge instruments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116.9
|
|
|
|
116.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
117,206,709
|
|
|
|
(1,078,137
|
)
|
|
$
|
1.2
|
|
|
$
|
943.4
|
|
|
$
|
(46.5
|
)
|
|
$
|
1,295.9
|
|
|
$
|
127.1
|
|
|
$
|
475.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock incentive plans
|
|
|
|
|
|
|
375,075
|
|
|
|
|
|
|
|
10.8
|
|
|
|
15.0
|
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive stock plan
|
|
|
197,052
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net issuance of restricted stock, less amortization
|
|
|
295,781
|
|
|
|
|
|
|
|
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
(1,464,108
|
)
|
|
|
|
|
|
|
|
|
|
|
(55.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.6
|
)
|
|
|
|
|
|
$
|
(35.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit post employment plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74.7
|
)
|
|
|
(74.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation and hedge instruments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136.9
|
)
|
|
|
(136.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
117,699,542
|
|
|
|
(2,167,170
|
)
|
|
$
|
1.2
|
|
|
$
|
977.6
|
|
|
$
|
(87.4
|
)
|
|
$
|
1,200.5
|
|
|
$
|
(85.9
|
)
|
|
$
|
(248.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
50
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the
Company) is a leading global supplier of highly
engineered systems and components primarily for powertrain
applications. These products are manufactured and sold
worldwide, primarily to original equipment manufacturers of
passenger cars, sport-utility vehicles, crossover vehicles,
trucks, commercial transportation products and industrial
equipment and to certain Tier One vehicle systems
suppliers. The Companys products fall into two reporting
segments: Engine and Drivetrain.
|
|
NOTE 1
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The following paragraphs briefly describe the Companys
significant accounting policies.
Use of estimates The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Concentrations of risk Cash is maintained with several
financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and are maintained with
financial institutions of reputable credit and therefore bear
minimal risk.
The Company performs ongoing credit evaluations of its suppliers
and customers and, with the exception of certain financing
transactions, does not require collateral from its customers.
The Companys customers are primarily original equipment
manufacturers of passenger cars, sport-utility vehicles,
crossover vehicles, trucks, commercial transportation products
and industrial equipment.
Some automotive parts suppliers continue to experience commodity
cost pressures and the effects of industry overcapacity. These
factors have increased pressure on the industrys supply
base, as suppliers cope with higher commodity costs, lower
production volumes and other challenges. The Company receives
certain of its raw materials from sole suppliers or a limited
number of suppliers. The inability of a supplier to fulfill
supply requirements of the Company could materially affect
future operating results.
Principles of consolidation The Consolidated Financial
Statements include all majority-owned subsidiaries. All
inter-company accounts and transactions have been eliminated in
consolidation.
Revenue recognition The Company recognizes revenue when
title and risk of loss pass to the customer, which is usually
upon shipment of product. Although the Company may enter into
long-term supply agreements with its major customers, each
shipment of goods is treated as a separate sale and the price is
not fixed over the life of the agreements.
Cash Cash is valued at fair market value. It is the
Companys policy to classify all highly liquid investments
with original maturities of three months or less as cash.
Marketable securities Marketable securities are
classified as available-for-sale. These investments are stated
at fair value with any unrealized holding gains or losses, net
of tax, included as a component of stockholders equity
until realized.
See Note 5 to the Consolidated Financial Statements for
more information on marketable securities.
Accounts receivable The Company securitizes and sells
certain receivables through third party financial institutions
without recourse. The amount sold can vary each month based on
the amount of underlying receivables. The Company continues to
administer the collection of these receivables on behalf of the
third party. The maximum size of the facility has been set at
$50 million since fourth quarter 2003.
During the years ended December 31, 2008 and 2007, total
cash proceeds from sales of accounts receivable were
$600 million. The Company paid servicing fees related to
these receivables of $1.9 million, $2.9 million and
$2.7 million in 2008, 2007 and 2006, respectively. These
amounts are recorded in interest expense and finance
51
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
charges in the Consolidated Statements of Operations. At
December 31, 2008 and 2007, the Company had sold
$50 million of receivables under a Receivables Transfer
Agreement for face value without recourse.
Inventories Inventories are valued at the lower of cost
or market. Cost of U.S. inventories is determined by the
last-in,
first-out (LIFO) method, while the foreign
operations use the
first-in,
first-out (FIFO) or average-cost methods. Inventory
held by U.S. operations was $124.1 million and
$135.9 million at December 31, 2008 and 2007,
respectively. Such inventories, if valued at current cost
instead of LIFO, would have been greater by $16.6 million
in 2008 and $13.5 million in 2007.
See Note 6 to the Consolidated Financial Statements for
more information on inventories.
Pre-production costs related to long-term supply arrangements
Engineering, research and development, and other design and
development costs for products sold on long-term supply
arrangements are expensed as incurred unless the Company has a
contractual guarantee for reimbursement from the customer. Costs
for molds, dies and other tools used to make products sold on
long-term supply arrangements for which the Company either has
title to the assets or has the non-cancelable right to use the
assets during the term of the supply arrangement are capitalized
in property, plant and equipment. Capitalized items specifically
designed for a supply arrangement are amortized to cost of sales
over the shorter of the term of the arrangement or over the
estimated useful lives of the assets, typically 3 to
5 years. Carrying values of assets capitalized according to
the foregoing policy are reviewed for impairment when events and
circumstances warrant such a review. Costs for molds, dies and
other tools used to make products sold on long-term supply
arrangements for which the Company has a contractual guarantee
for lump sum reimbursement from the customer are capitalized in
prepayments and other current assets.
Property, plant and equipment and depreciation Property,
plant and equipment are valued at cost less accumulated
depreciation. Expenditures for maintenance, repairs and renewals
of relatively minor items are generally charged to expense as
incurred. Renewals of significant items are capitalized.
Depreciation is computed generally on a straight-line basis over
the estimated useful lives of the assets. Useful lives for
buildings range from 15 to 40 years and useful lives for
machinery and equipment range from 3 to 12 years. For
income tax purposes, accelerated methods of depreciation are
generally used.
See Note 6 to the Consolidated Financial Statements for
more information on property, plant and equipment and
depreciation.
Impairment of long-lived assets The Company reviews the
carrying value of its long-lived assets, whether held for use or
disposal, including other intangible assets, when events and
circumstances warrant such a review. This review is performed
using estimates of future cash flows. If the carrying value of a
long-lived asset is considered impaired, an impairment charge is
recorded for the amount by which the carrying value of the
long-lived asset exceeds its fair value. Management believes
that the estimates of future cash flows and fair value
assumptions are reasonable; however, changes in assumptions
underlying these estimates could affect the evaluations.
Long-lived assets held for sale are recorded at the lower of
their carrying amount or fair value less cost to sell.
Significant judgments and estimates used by management when
evaluating long-lived assets for impairment include: (i) an
assessment as to whether an adverse event or circumstance has
triggered the need for an impairment review; and
(ii) undiscounted future cash flows generated by the asset.
The Company recognized $72.9 million and $56.4 million
in impairment of long-lived assets as part of restructuring
expenses in 2008 and 2006, respectively.
See Note 19 to the Consolidated Financial Statements for
more information regarding the Companys 2006 and 2008
impairment of long-lived assets.
Goodwill and other intangible assets Under Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, goodwill is no longer amortized;
however, it must be tested for impairment at least annually. In
the fourth quarter of each year, or when events and
circumstances warrant such a review, the Company reviews the
goodwill of all of its reporting units for impairment. The fair
value of the Companys businesses used in the determination
of goodwill impairment is computed using the expected present
52
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value of associated future cash flows. This review requires the
Company to make significant assumptions and estimates about the
extent and timing of future cash flows, discount rates and
growth rates. The cash flows are estimated over a significant
future period of time, which makes those estimates and
assumptions subject to an even higher degree of uncertainty. The
Company also utilizes market valuation models and other
financial ratios, which require the Company to make certain
assumptions and estimates regarding the applicability of those
models to its assets and businesses. The Company believes that
the assumptions and estimates used to determine the estimated
fair values of each of its reporting units are reasonable.
However, different assumptions could materially affect the
estimated fair value. The Company recognized goodwill impairment
of $156.8 million in the Engine segment in 2008 and
$0.2 million in the Drivetrain segment in 2006. No goodwill
impairment was recorded in 2007.
See Note 7 to the Consolidated Financial Statements for
more information regarding goodwill.
Product warranty The Company provides warranties on some
of its products. The warranty terms are typically from one to
three years. Provisions for estimated expenses related to
product warranty are made at the time products are sold. These
estimates are established using historical information about the
nature, frequency, and average cost of warranty claim
settlements as well as product manufacturing and industry
developments and recoveries from third parties. Management
actively studies trends of warranty claims and takes action to
improve product quality and minimize warranty claims. Management
believes that the warranty accrual is appropriate; however,
actual claims incurred could differ from the original estimates,
requiring adjustments to the accrual. The accrual is represented
in both current and non-current liabilities on the balance sheet.
See Note 8 to the Consolidated Financial Statements for
more information on product warranties.
Other loss accruals and valuation allowances The Company
has numerous other loss exposures, such as customer claims,
workers compensation claims, litigation, and
recoverability of assets. Establishing loss accruals or
valuation allowances for these matters requires the use of
estimates and judgment in regard to the risk exposure and
ultimate realization. The Company estimates losses under the
programs using consistent and appropriate methods; however,
changes to its assumptions could materially affect its recorded
accrued liabilities for loss or asset valuation allowances.
Derivative financial instruments The Company recognizes
that certain normal business transactions generate risk.
Examples of risks include exposure to exchange rate risk related
to transactions denominated in currencies other than the
functional currency, changes in cost of major raw materials and
supplies, and changes in interest rates. It is the objective and
responsibility of the Company to assess the impact of these
transaction risks, and offer protection from selected risks
through various methods including financial derivatives.
Virtually all derivative instruments held by the Company are
designated as hedges, have high correlation with the underlying
exposure and are highly effective in offsetting underlying price
movements. Accordingly, gains and losses from changes in
qualifying hedge fair values are matched with the underlying
transactions. All hedge instruments are carried at their fair
value based on quoted market prices for contracts with similar
maturities. The Company does not engage in any derivative
transactions for purposes other than hedging specific risks.
See Note 11 to the Consolidated Financial Statements for
more information on derivative financial instruments.
Foreign currency The financial statements of foreign
subsidiaries are translated to U.S. Dollars using the
period-end exchange rate for assets and liabilities and an
average exchange rate for each period for revenues, expenses,
and capital expenditures. The local currency is the functional
currency for substantially all the Companys foreign
subsidiaries. Translation adjustments for foreign subsidiaries
are recorded as a component of accumulated other comprehensive
income (loss) in stockholders equity. The Company
recognizes transaction gains and losses arising from
fluctuations in currency exchange rates on transactions
denominated in currencies other than the functional currency in
earnings as incurred, except for those transactions which hedge
purchase commitments and for those intercompany balances which
are designated as long-term investments. Net income
53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included a foreign currency transaction loss of
$5.8 million in 2008. Net income included foreign currency
transaction gains of $4.4 million and $1.6 million in
2007 and 2006, respectively.
See Note 14 to the Consolidated Financial Statements for
more information on other comprehensive income (loss).
New Accounting Pronouncements In June 2006, the FASB
issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
prescribes a consistent recognition threshold and measurement
attribute, as well as clear criteria for subsequently
recognizing, derecognizing and measuring such tax positions for
financial statement purposes. FIN 48 also requires expanded
disclosure with respect to the uncertainty in income taxes. The
Company adopted the provisions of FIN 48 on January 1,
2007. As a result of the implementation of FIN 48, the
Company recognized a $16.6 million reduction to its
January 1, 2007 retained earnings balance.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(FAS 157). FAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. On
January 1, 2008, the Company partially adopted as required,
FAS 157. See Note 10 to the Consolidated Financial
Statements for more information regarding the implementation of
FAS 157.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(FAS 159). FAS 159 allows entities to
irrevocably elect to recognize most financial assets and
financial liabilities at fair value on an
instrument-by-instrument
basis. The stated objective of FAS 159 is to improve
financial reporting by giving entities the opportunity to elect
to measure certain financial assets and liabilities at fair
value in order to mitigate earnings volatility caused when
related assets and liabilities are measured differently.
FAS 159 is effective for the Company beginning with its
quarter ending March 31, 2008. The Company chose to not
make the election to adopt.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised 2007), Business
Combinations (FAS 141(R)). FAS 141(R)
establishes principles and requirements for recognizing
identifiable assets acquired, liabilities assumed,
noncontrolling interest in the acquiree, goodwill acquired in
the combination or the gain from a bargain purchase, and
disclosure requirements. Under this revised statement, all costs
incurred to effect an acquisition will be recognized separately
from the acquisition. Also, restructuring costs that are
expected but the acquirer is not obligated to incur will be
recognized separately from the acquisition. FAS 141(R) is
effective for the Company beginning with its quarter ending
March 31, 2009. The Company has incurred $3.2 million
of on-going acquisition related costs, which will be expensed
upon adoption of FAS 141(R) in the first quarter of 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests
in Consolidated Financial Statements
(FAS 160). FAS 160 requires that
ownership interests in subsidiaries held by parties other than
the parent are clearly identified. In addition, it requires that
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and
presented on the face of the income statement. FAS 160 is
effective for the Company beginning with its quarter ending
March 31, 2009. The adoption of FAS 160 is not
expected to have a material impact on the Companys
consolidated financial position, results of operations or cash
flows.
In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2
(FSP
FAS 157-2).
FSP
FAS 157-2
delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities that are recognized or
disclosed in the financial statements on a nonrecurring basis to
fiscal years beginning after November 15, 2008. Refer to
Note 10, Fair Value Measurements of the Notes
to the Consolidated Financial Statements for further discussion
of the Companys partial adoption of FSP
FAS 157-2.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative Instruments
and Hedging Activities (FAS 161). FAS 161
requires entities to provide enhanced disclosures about how and
why an entity uses derivative instruments, how derivative
instruments and related
54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
hedged items are accounted for under Statement 133 and its
related interpretations, and how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. FAS 161 is effective
for the Company beginning with its quarter ending March 31,
2009. The adoption of FAS 161 is not expected to have a
material impact on the Companys consolidated financial
position, results of operations or cash flows.
In December 2008, the FASB issued Staff Position 132(R)-1,
Employers Disclosures about Postretirement Benefit Plan
Assets (FAS 132(R)-1). FAS 132(R)-1
requires entities to provide enhanced disclosures about how
investment allocation decisions are made, the major categories
of plan assets, the inputs and valuation techniques used to
measure fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in
plan assets for the period, and significant concentrations of
risk within plan assets. FAS 132(R)-1 is effective for the
Company beginning with its year ending December 31, 2009.
The Company is currently assessing the potential impacts, if
any, on its consolidated financial statements.
In December 2008, the FASB issued Staff Position
140-4 and
Financial Interpretation 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities
(FSP 140-4
and FIN 46(R)-8).
FSP 140-4
and FIN 46(R)-8 requires entities to provide enhanced
disclosures about how an entity accounts for transfers of
financial assets, the nature of involvement, if any, after the
financial asset sale and the nature of any restrictions on
assets reported by an entity in its statement of financial
position that relates to a transferred financial asset,
including the carrying amounts of such assets. The Company has
adjusted its disclosures to be complaint with
FSP 140-4
and
FIN 46(R)-8
at December 31, 2008.
|
|
NOTE 2
|
RESEARCH
AND DEVELOPMENT COSTS
|
The following table presents the Companys gross and net
expenditures on research and development (R&D)
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Gross R&D expenditures
|
|
$
|
273.4
|
|
|
$
|
246.7
|
|
|
$
|
219.5
|
|
Customer reimbursements
|
|
|
(67.7
|
)
|
|
|
(35.9
|
)
|
|
|
(31.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net R&D expenditures
|
|
$
|
205.7
|
|
|
$
|
210.8
|
|
|
$
|
187.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys net R&D expenditures are included
in the selling, general, and administrative expenses of the
Consolidated Statements of Operations. Customer reimbursements
are netted against gross R&D expenditures upon billing
of services performed. The Company has contracts with several
customers at the Companys various R&D locations. No
such contract exceeded $6 million in any of the years
presented.
Items included in other income consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest income
|
|
$
|
(7.1
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
(3.2
|
)
|
Net gain on sale of businesses
|
|
|
|
|
|
|
|
|
|
|
(4.8
|
)
|
Loss on the sale of a product line
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
Net loss on asset disposals
|
|
|
2.0
|
|
|
|
0.6
|
|
|
|
1.0
|
|
Other
|
|
|
(0.2
|
)
|
|
|
(0.7
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
$
|
(3.1
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Earnings before income taxes and the provision for income taxes
are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Year Ended December 31,
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
Total
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
Total
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
Total
|
|
|
Earnings before taxes
|
|
$
|
(123.8
|
)
|
|
$
|
137.8
|
|
|
$
|
14.0
|
|
|
$
|
48.4
|
|
|
$
|
382.0
|
|
|
$
|
430.4
|
|
|
$
|
(27.2
|
)
|
|
$
|
297.5
|
|
|
$
|
270.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal/foreign
|
|
|
7.7
|
|
|
|
99.5
|
|
|
|
107.2
|
|
|
|
36.6
|
|
|
|
106.2
|
|
|
|
142.8
|
|
|
|
(11.1
|
)
|
|
|
87.7
|
|
|
|
76.6
|
|
State
|
|
|
1.0
|
|
|
|
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
|
|
|
|
1.0
|
|
|
|
2.2
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
8.7
|
|
|
|
99.5
|
|
|
|
108.2
|
|
|
|
37.6
|
|
|
|
106.2
|
|
|
|
143.8
|
|
|
|
(8.9
|
)
|
|
|
87.7
|
|
|
|
78.8
|
|
Deferred
|
|
|
(44.7
|
)
|
|
|
(30.2
|
)
|
|
|
(74.9
|
)
|
|
|
(10.0
|
)
|
|
|
(19.9
|
)
|
|
|
(29.9
|
)
|
|
|
(27.4
|
)
|
|
|
(19.0
|
)
|
|
|
(46.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
(36.0
|
)
|
|
$
|
69.3
|
|
|
$
|
33.3
|
|
|
$
|
27.6
|
|
|
$
|
86.3
|
|
|
$
|
113.9
|
|
|
$
|
(36.3
|
)
|
|
$
|
68.7
|
|
|
$
|
32.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(29.1
|
)%
|
|
|
50.3
|
%
|
|
|
237.9
|
%
|
|
|
57.0
|
%
|
|
|
22.6
|
%
|
|
|
26.5
|
%
|
|
|
(133.5
|
)%
|
|
|
23.1
|
%
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes resulted in an effective tax rate
for 2008 of 237.9% compared with rates of 26.5% in 2007 and
12.0% in 2006. The effective tax rate of 237.9% for 2008 differs
from the U.S. statutory rate primarily due to the
non-deductibility of the $156.8 million impairment charge
in 2008 related to BERU goodwill; a reduction in
U.S. income; foreign rates, which differ from those in the
U.S.; the realization of certain business tax credits including
R&D and foreign tax credits; and favorable permanent
differences between book and tax treatment for items, including
equity in affiliates earnings.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), on January 1, 2007. As a result
of the implementation of FIN 48, the Company recognized a
$16.6 million reduction to the January 1, 2007 balance
of retained earnings. At December 31, 2007, the Company
reported $71.7 million of unrecognized tax benefits;
approximately $62.5 million represent the amount that, if
recognized, would affect the Companys global effective
income tax rate in future periods.
Following is a reconciliation of the Companys total gross
unrecognized tax benefits for the year-to-date periods ended
December 31, 2008 and 2007, respectively. Of the total
$61.1 million of unrecognized tax benefits as of
December 31, 2008, approximately $51.1 million of this
total represents the amount that, if recognized, would affect
the Companys effective income tax rate in future periods.
This amount differs from the gross unrecognized tax benefits
presented in the table due to the decrease in the
U.S. federal income taxes which would occur upon
recognition of the state tax benefits included therein.
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Balance, January 1
|
|
$
|
71.7
|
|
|
$
|
50.5
|
|
Additions based on tax positions related to current year
|
|
|
0.5
|
|
|
|
1.2
|
|
Additions for tax positions of prior years
|
|
|
0.2
|
|
|
|
20.0
|
|
Reductions for tax positions of prior years
|
|
|
(1.7
|
)
|
|
|
|
|
Settlements
|
|
|
(6.7
|
)
|
|
|
|
|
Translation adjustment
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
61.1
|
|
|
$
|
71.7
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2008, the Company made a
$6.6 million cash payment to the IRS to resolve agreed upon
issues of the ongoing IRS examination of the Companys
2002-2004
tax years. There was a reduction in the first quarter of 2008 of
$6.7 million related to the Companys unrecognized tax
benefits balance due to the settlement of the agreed upon issues
primarily related to the Extraterritorial Income Exclusion for
the
2002-2004
tax years. The Company is currently in the appeals process on
disputed issues related to the
56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002-2004
IRS audit, which is not expected to be resolved by
December 31, 2009. Other possible changes in the
unrecognized tax benefits balance related to other examinations
cannot be reasonably estimated within the next 12 months.
The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. The Company had
$9.7 million accrued at January 1, 2008 for the
payment of any such interest and penalties. The Company had
approximately $11.4 million for the payment of interest and
penalties accrued at December 31, 2008.
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. The Company is no longer subject to
income tax examinations by tax authorities in its major tax
jurisdictions as follows:
|
|
|
|
|
|
|
Years No Longer
|
|
Tax Jurisdiction
|
|
Subject to Audit
|
|
|
U.S. Federal
|
|
|
2001 and prior
|
|
Brazil
|
|
|
2002 and prior
|
|
France
|
|
|
2006 and prior
|
|
Germany
|
|
|
2003 and prior
|
|
Hungary
|
|
|
2004 and prior
|
|
Italy
|
|
|
2002 and prior
|
|
Japan
|
|
|
2006 and prior
|
|
South Korea
|
|
|
2004 and prior
|
|
United Kingdom
|
|
|
2006 and prior
|
|
In certain tax jurisdictions the Company may have more than one
taxpayer. The table above reflects the status of the major
taxpayers in each major tax jurisdiction.
The analysis of the variance of income taxes as reported from
income taxes computed at the U.S. statutory rate for
consolidated operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income taxes at U.S. statutory rate of 35%
|
|
$
|
4.9
|
|
|
$
|
150.6
|
|
|
$
|
94.6
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
non-U.S.
sources including withholding taxes
|
|
|
(26.5
|
)
|
|
|
(12.3
|
)
|
|
|
(8.8
|
)
|
State taxes, net of federal benefit
|
|
|
0.9
|
|
|
|
(0.6
|
)
|
|
|
(1.5
|
)
|
Business tax credits
|
|
|
(9.8
|
)
|
|
|
(8.6
|
)
|
|
|
(1.0
|
)
|
Affiliates earnings
|
|
|
(13.2
|
)
|
|
|
(13.1
|
)
|
|
|
(11.3
|
)
|
Accrual adjustment and settlement of prior year tax matters
|
|
|
6.0
|
|
|
|
24.6
|
|
|
|
(22.9
|
)
|
Changes in tax laws
|
|
|
|
|
|
|
(24.2
|
)
|
|
|
(10.4
|
)
|
Medicare prescription drug benefit
|
|
|
1.1
|
|
|
|
(2.1
|
)
|
|
|
(3.8
|
)
|
Capital loss limitation
|
|
|
|
|
|
|
|
|
|
|
5.7
|
|
Goodwill impairment
|
|
|
54.9
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
0.6
|
|
|
|
|
|
|
|
(5.0
|
)
|
Valuation allowance
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
Non-temporary differences and other
|
|
|
1.3
|
|
|
|
(0.4
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes as reported
|
|
$
|
33.3
|
|
|
$
|
113.9
|
|
|
$
|
32.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2007, the government of the United Kingdom enacted a
statutory income tax rate reduction from 30% to 28%, effective
April 1, 2008. In August 2007, the government of Germany
enacted a federal statutory income tax rate reduction from 38%
to 28%, effective January 1, 2008. In addition, Korea also
reduced its federal statutory income tax rate from 27.5% to
24.2% effective January 1, 2009.
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following are the gross components of deferred tax assets and
liabilities as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee related
|
|
$
|
28.5
|
|
|
$
|
15.5
|
|
Inventory
|
|
|
5.1
|
|
|
|
5.6
|
|
Warranties
|
|
|
4.4
|
|
|
|
2.8
|
|
Litigation & environmental
|
|
|
4.0
|
|
|
|
1.2
|
|
Net operating loss carryforwards
|
|
|
1.8
|
|
|
|
0.6
|
|
Derivatives
|
|
|
10.5
|
|
|
|
4.5
|
|
Accrued interest
|
|
|
|
|
|
|
0.9
|
|
Customer claims
|
|
|
2.3
|
|
|
|
|
|
Other
|
|
|
10.9
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
$
|
67.5
|
|
|
$
|
42.1
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(2.0
|
)
|
|
$
|
|
|
Employee related
|
|
|
|
|
|
|
(1.4
|
)
|
Other
|
|
|
(0.7
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
Total current deferred tax liabilities
|
|
$
|
(2.7
|
)
|
|
$
|
(3.3
|
)
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension and other post employment benefits
|
|
$
|
89.5
|
|
|
$
|
102.8
|
|
Other comprehensive income
|
|
|
114.5
|
|
|
|
68.0
|
|
Employee related
|
|
|
13.9
|
|
|
|
16.2
|
|
Litigation and environmental
|
|
|
3.2
|
|
|
|
3.5
|
|
Warranties
|
|
|
6.4
|
|
|
|
6.9
|
|
Foreign tax credits
|
|
|
78.3
|
|
|
|
25.0
|
|
Research and development credits
|
|
|
6.6
|
|
|
|
5.7
|
|
Capital loss carryforwards
|
|
|
20.4
|
|
|
|
19.4
|
|
Net operating loss carryforwards
|
|
|
12.9
|
|
|
|
9.0
|
|
Other
|
|
|
8.3
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax assets
|
|
$
|
354.0
|
|
|
$
|
263.5
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
(98.3
|
)
|
|
$
|
(127.5
|
)
|
Goodwill & intangibles
|
|
|
(104.5
|
)
|
|
|
(80.8
|
)
|
Other comprehensive income
|
|
|
(3.1
|
)
|
|
|
(1.5
|
)
|
Lease obligation production equipment
|
|
|
(4.0
|
)
|
|
|
(5.0
|
)
|
Other
|
|
|
(1.3
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax liabilities
|
|
$
|
(211.2
|
)
|
|
$
|
(216.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
207.6
|
|
|
$
|
85.8
|
|
Valuation allowances
|
|
|
(31.0
|
)
|
|
|
(24.0
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
176.6
|
|
|
$
|
61.8
|
|
|
|
|
|
|
|
|
|
|
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The deferred tax assets and liabilities recognized in the
Companys Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Deferred income taxes current assets
|
|
$
|
67.5
|
|
|
$
|
42.8
|
|
Deferred income taxes current liabilities
|
|
|
(2.7
|
)
|
|
|
(3.3
|
)
|
Other non-current assets
|
|
|
201.4
|
|
|
|
124.4
|
|
Other non-current liabilities
|
|
|
(89.6
|
)
|
|
|
(102.1
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (current and non-current)
|
|
$
|
176.6
|
|
|
$
|
61.8
|
|
|
|
|
|
|
|
|
|
|
The deferred income taxes current assets are
primarily comprised of amounts from the U.S., France, India,
Japan, Mexico and the U.K. The deferred income taxes
current liabilities are primarily comprised of amounts from
Germany. The other non-current assets are primarily comprised of
amounts from the U.S. and Korea. The other non-current
liabilities are primarily comprised of amounts from Germany,
Hungary, Italy, Monaco and the U.K.
The Company has a U.S. capital loss carryforward of
$20.4 million, which will expire in 2010, 2011, 2012 and
2013. A valuation allowance of $16.9 million has been
recorded for the tax effect of some of this loss carryforward.
The foreign tax credits of $78.3 million will expire
beginning in 2013 through 2018. A valuation allowance of
$13.5 million has been recorded for the tax effect of some
of this carryforward.
At December 31, 2008, certain
non-U.S. subsidiaries
have net operating loss carryforwards totaling
$63.5 million that are available to offset future taxable
income. Carryforwards of $34.6 million expire at various
dates from 2009 through 2016 and the balance has no expiration
date. A valuation allowance of $1.5 million has been
recorded for the tax effect on $5.5 million of the loss
carryforwards. Any benefit resulting from the utilization of
$6.0 million of the operating loss carryforwards will be
applied to reduce goodwill related to the BERU acquisition.
Certain U.S. subsidiaries have state net operating loss
carryforwards totaling $240.7 million and
235.2 million in 2008 and 2007, respectively, for which a
non-current deferred tax asset has been established in 2008 on
$7.7 million of the loss carryforward and the remainder is
completely offset by a valuation allowance due to risk of
realization. Certain non-U.S. subsidiaries located in China and
Korea have tax exemptions or tax holidays. The cumulative impact
of these tax exemptions or tax holidays to the effective tax
rate in 2008 was negligible.
No deferred income taxes have been provided on the excess of the
amount for financial reporting over the tax basis of investments
in foreign subsidiaries or foreign equity affiliates totaling
$1,465.6 million in 2008, as these amounts are essentially
permanent in nature. The excess amount will become taxable upon
repatriation of assets, sale, or liquidation of the investment.
It is not practicable to determine the unrecognized deferred tax
liability on the excess amount because the actual tax liability
on the excess amount, if any, is dependent on circumstances
existing when remittance occurs.
|
|
NOTE 5
|
MARKETABLE
SECURITIES
|
As of December 31, 2008 the Company had no investments in
marketable securities. At December 31, 2007, the Company
had $14.6 million in marketable securities, primarily bank
notes. The securities are carried at fair value with the
unrealized gain or loss, net of tax, reported in other
comprehensive income (loss). As of December 31, 2007,
$7.3 million of the contractual maturities are within one
to five years and $7.3 million are due beyond five years.
Gross proceeds from sales of marketable securities were
$14.6 million and $60.4 million in 2008 and 2007,
respectively. No gain or loss was realized in 2008. A net
realized loss of $0.1 million, based on specific
identification of securities sold, has been reported in other
income for the year ended December 31, 2007.
59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
BALANCE
SHEET INFORMATION
|
Detailed balance sheet data are as follows:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
|
2007
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Customers
|
|
$
|
522.7
|
|
|
$
|
721.9
|
|
Other
|
|
|
90.1
|
|
|
|
85.7
|
|
|
|
|
|
|
|
|
|
|
Gross receivables
|
|
|
612.8
|
|
|
|
807.6
|
|
Bad debt allowance (a)
|
|
|
(5.7
|
)
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
Net receivables
|
|
$
|
607.1
|
|
|
$
|
802.4
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw material and supplies
|
|
$
|
260.7
|
|
|
$
|
246.7
|
|
Work in progress
|
|
|
95.7
|
|
|
|
99.8
|
|
Finished goods
|
|
|
111.4
|
|
|
|
114.6
|
|
|
|
|
|
|
|
|
|
|
FIFO inventories
|
|
|
467.8
|
|
|
|
461.1
|
|
LIFO reserve
|
|
|
(16.6
|
)
|
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
Net inventories
|
|
$
|
451.2
|
|
|
$
|
447.6
|
|
|
|
|
|
|
|
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Product liability insurance receivable
|
|
$
|
22.1
|
|
|
$
|
20.1
|
|
Prepaid tax
|
|
|
1.6
|
|
|
|
2.2
|
|
Prepaid insurance
|
|
|
1.6
|
|
|
|
1.4
|
|
Other
|
|
|
53.7
|
|
|
|
60.7
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
79.0
|
|
|
$
|
84.4
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
56.1
|
|
|
$
|
46.3
|
|
Buildings
|
|
|
563.7
|
|
|
|
558.6
|
|
Machinery and equipment
|
|
|
1,756.1
|
|
|
|
1,806.1
|
|
Capital leases
|
|
|
1.1
|
|
|
|
1.1
|
|
Construction in progress
|
|
|
160.0
|
|
|
|
143.4
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
2,537.0
|
|
|
|
2,555.5
|
|
Accumulated depreciation
|
|
|
(1,047.4
|
)
|
|
|
(1,037.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,489.6
|
|
|
|
1,517.6
|
|
Tooling, net of amortization
|
|
|
96.6
|
|
|
|
91.5
|
|
|
|
|
|
|
|
|
|
|
Property, plant & equipment, net
|
|
$
|
1,586.2
|
|
|
$
|
1,609.1
|
|
|
|
|
|
|
|
|
|
|
Investments and advances:
|
|
|
|
|
|
|
|
|
Investment in equity affiliates
|
|
$
|
214.3
|
|
|
$
|
211.3
|
|
Other investments and advances
|
|
|
52.2
|
|
|
|
43.8
|
|
|
|
|
|
|
|
|
|
|
Total investments and advances
|
|
$
|
266.5
|
|
|
$
|
255.1
|
|
|
|
|
|
|
|
|
|
|
60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
|
2007
|
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
|
Deferred pension assets
|
|
$
|
0.5
|
|
|
$
|
28.8
|
|
Product liability insurance receivable
|
|
|
12.6
|
|
|
|
19.5
|
|
Deferred income taxes
|
|
|
201.4
|
|
|
|
124.4
|
|
Other intangible assets
|
|
|
148.4
|
|
|
|
139.4
|
|
Other
|
|
|
67.8
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets
|
|
$
|
430.7
|
|
|
$
|
345.8
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
466.6
|
|
|
$
|
626.3
|
|
Severance
|
|
|
51.0
|
|
|
|
9.1
|
|
Payroll and related
|
|
|
95.4
|
|
|
|
139.7
|
|
Environmental
|
|
|
5.9
|
|
|
|
7.7
|
|
Product liability
|
|
|
22.1
|
|
|
|
20.1
|
|
Product warranties
|
|
|
51.4
|
|
|
|
34.7
|
|
Insurance
|
|
|
12.5
|
|
|
|
11.9
|
|
Customer related
|
|
|
23.3
|
|
|
|
27.0
|
|
Interest
|
|
|
10.6
|
|
|
|
10.3
|
|
Dividends payable to minority shareholders
|
|
|
6.4
|
|
|
|
10.9
|
|
Retirement related
|
|
|
38.7
|
|
|
|
38.0
|
|
Current deferred income taxes
|
|
|
2.7
|
|
|
|
3.3
|
|
Domination and Profit Transfer Agreement obligation
|
|
|
44.0
|
|
|
|
|
|
Derivatives
|
|
|
51.4
|
|
|
|
20.4
|
|
Other
|
|
|
41.0
|
|
|
|
33.6
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
923.0
|
|
|
$
|
993.0
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
Environmental
|
|
$
|
7.4
|
|
|
$
|
7.8
|
|
Product warranties
|
|
|
30.7
|
|
|
|
35.4
|
|
Deferred income taxes
|
|
|
89.6
|
|
|
|
102.1
|
|
Product liability accrual
|
|
|
12.6
|
|
|
|
19.5
|
|
Self-insurance
|
|
|
7.6
|
|
|
|
7.0
|
|
Lease residual value
|
|
|
4.1
|
|
|
|
6.0
|
|
Employee costs
|
|
|
2.9
|
|
|
|
7.6
|
|
Cross currency swaps
|
|
|
55.1
|
|
|
|
33.7
|
|
Deferred revenue
|
|
|
25.2
|
|
|
|
23.6
|
|
Derivatives
|
|
|
26.7
|
|
|
|
7.9
|
|
Other
|
|
|
91.2
|
|
|
|
112.0
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities
|
|
$
|
353.1
|
|
|
$
|
362.6
|
|
|
|
|
|
|
|
|
|
|
61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Beginning balance
|
|
$
|
(5.2
|
)
|
|
$
|
(7.8
|
)
|
|
$
|
(8.3
|
)
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
Provision
|
|
|
(2.4
|
)
|
|
|
0.3
|
|
|
|
(0.8
|
)
|
Write-offs
|
|
|
1.6
|
|
|
|
3.0
|
|
|
|
2.0
|
|
Translation adjustment
|
|
|
0.3
|
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(5.7
|
)
|
|
$
|
(5.2
|
)
|
|
$
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest costs capitalized during 2008 and 2007 were
$13.3 million and $9.6 million, respectively. As of
December 31, 2008 and December 31, 2007, accounts
payable of $43.2 million and $45.8 million,
respectively, were related to property, plant and equipment
purchases. As of December 31, 2008 and December 31,
2007, specific assets of $7.4 million and
$16.5 million, respectively, were pledged as collateral
under certain of the Companys long-term debt agreements.
NSK-Warner
The Company has a 50% interest in NSK-Warner, a joint venture
based in Japan that manufactures automatic transmission
components. The Companys share of the earnings or losses
reported by NSK-Warner is accounted for using the equity method
of accounting. NSK-Warner has a fiscal year-end of
March 31. The Companys equity in the earnings of
NSK-Warner consists of the 12 months ended November 30 so
as to reflect earnings on as current a basis as is reasonably
feasible. NSK-Warner is the joint venture partner with a 40%
interest in the Drivetrain Groups South Korean subsidiary,
BorgWarner Transmission Systems Korea Inc. Dividends received
from NSK-Warner were $40.8 million, $15.7 million and
$41.1 million in 2008, 2007 and 2006, respectively.
Following are summarized financial data for NSK-Warner,
translated using the ending or periodic rates as of and for the
years ended November 30, 2008, 2007 and 2006 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
319.1
|
|
|
$
|
304.6
|
|
|
$
|
256.8
|
|
Non-current assets
|
|
|
185.7
|
|
|
|
164.3
|
|
|
|
136.8
|
|
Current liabilities
|
|
|
146.3
|
|
|
|
148.8
|
|
|
|
128.6
|
|
Non-current liabilities
|
|
|
40.5
|
|
|
|
22.9
|
|
|
|
19.7
|
|
Statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
637.9
|
|
|
$
|
552.1
|
|
|
$
|
535.4
|
|
Gross profit
|
|
|
140.0
|
|
|
|
122.7
|
|
|
|
111.6
|
|
Net income
|
|
|
67.6
|
|
|
|
69.4
|
|
|
|
54.7
|
|
The equity of NSK-Warner as of November 30, 2008 was
$318.0 million, there was no debt and their cash and
securities were $132.1 million.
Purchases from NSK-Warner for the years ended December 31,
2008, 2007 and 2006 were $25.4 million, $24.2 million
and $23.0 million, respectively.
|
|
NOTE 7
|
GOODWILL
AND OTHER INTANGIBLES
|
As of September 30, 2008 and December 31, 2008, the
Company recorded an impairment charge of 104.3
$(146.8) million and 7.2 $(10.0) million,
respectively, to adjust BERUs goodwill to its estimated
fair value. The impairment charge is attributable to a decrease
in the operating units estimated fair value based
primarily upon
62
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the effect of the decline in European market conditions on
current and projected operating results. The impairment charge
was also impacted by the recognition of additional goodwill in
the second quarter of 2008, which was based on the court
determined buy out value of 71.32 per share related to the
Domination and Profit Transfer Agreement. Any differences in
future results compared to managements estimates could
result in fair values different from estimated fair values,
which could materially impact the Companys future results
of operations and financial condition.
See Note 20, Recent Transactions, for further
discussion on the BERU AG Domination and Profit Transfer
Agreement.
The changes in the carrying amount of goodwill for the twelve
months ended December 31, 2006, 2007 and 2008 are as
follows:
|
|
|
|
|
millions of dollars
|
|
|
|
|
Balance at January 1, 2006
|
|
$
|
1,029.8
|
|
Goodwill impairment
|
|
|
(0.2
|
)
|
ETEC acquisition
|
|
|
21.9
|
|
Translation adjustment
|
|
|
35.0
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
1,086.5
|
|
BERU acquisition 12.8%
|
|
|
48.7
|
|
Translation adjustment
|
|
|
33.0
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,168.2
|
|
BERU acquisition 17.8%
|
|
|
74.5
|
|
Goodwill impairment
|
|
|
(156.8
|
)
|
Translation adjustment
|
|
|
(33.5
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,052.4
|
|
|
|
|
|
|
The Companys other intangible assets, primarily from
acquisitions consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
millions of dollars
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented technology
|
|
$
|
16.8
|
|
|
$
|
4.2
|
|
|
$
|
12.6
|
|
|
$
|
13.8
|
|
|
$
|
2.9
|
|
|
$
|
10.9
|
|
Unpatented technology
|
|
|
6.6
|
|
|
|
2.3
|
|
|
|
4.3
|
|
|
|
6.5
|
|
|
|
1.5
|
|
|
|
5.0
|
|
Customer relationships
|
|
|
116.3
|
|
|
|
32.5
|
|
|
|
83.8
|
|
|
|
100.8
|
|
|
|
22.9
|
|
|
|
77.9
|
|
Distribution network
|
|
|
53.1
|
|
|
|
31.9
|
|
|
|
21.2
|
|
|
|
45.6
|
|
|
|
23.2
|
|
|
|
22.4
|
|
Miscellaneous
|
|
|
14.7
|
|
|
|
11.9
|
|
|
|
2.8
|
|
|
|
14.7
|
|
|
|
11.9
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets
|
|
|
207.5
|
|
|
|
82.8
|
|
|
|
124.7
|
|
|
|
181.4
|
|
|
|
62.4
|
|
|
|
119.0
|
|
Unamortized trade names
|
|
|
23.7
|
|
|
|
|
|
|
|
23.7
|
|
|
|
20.4
|
|
|
|
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
231.2
|
|
|
$
|
82.8
|
|
|
$
|
148.4
|
|
|
$
|
201.8
|
|
|
$
|
62.4
|
|
|
$
|
139.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of other intangible assets was $27.1 million, $21.5
million and $17.5 million in 2008, 2007 and 2006, respectively.
The amortization totals include non-recurring charges directly
attributable to acquisitions, as described in Note 20,
Recent Transactions. The estimated useful lives of
the Companys amortized intangible assets range from 4 to
12 years. The Company utilizes the straight line method of
amortization, recognized over the estimated useful lives of the
assets. The estimated future annual amortization expense,
primarily for acquired intangible assets, is as follows:
$24.9 million in 2009, $17.5 million in 2010,
$17.5 million in 2011, $17.4 million in 2012 and
$17.3 million in 2013.
63
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A roll-forward of the gross carrying amounts for the years ended
December 31, 2008 and 2007 is presented below:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
201.8
|
|
|
$
|
161.3
|
|
Acquisitions
|
|
|
36.7
|
|
|
|
25.0
|
|
Translation adjustment
|
|
|
(7.3
|
)
|
|
|
15.5
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
231.2
|
|
|
$
|
201.8
|
|
|
|
|
|
|
|
|
|
|
A roll-forward of accumulated amortization for the years ended
December 31, 2008 and 2007 is presented below:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
62.4
|
|
|
$
|
40.9
|
|
Provisions
|
|
|
27.1
|
|
|
|
19.4
|
|
Non-recurring charges
|
|
|
(3.2
|
)
|
|
|
(2.1
|
)
|
Translation adjustment
|
|
|
(3.5
|
)
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
82.8
|
|
|
$
|
62.4
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying amount of the Companys total
product warranty liability for the years ended December 31,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
70.1
|
|
|
$
|
60.0
|
|
Acquisition
|
|
|
|
|
|
|
|
|
Provisions
|
|
|
66.1
|
|
|
|
60.7
|
|
Payments
|
|
|
(50.6
|
)
|
|
|
(54.9
|
)
|
Translation adjustment
|
|
|
(3.5
|
)
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
82.1
|
|
|
$
|
70.1
|
|
|
|
|
|
|
|
|
|
|
Contained within the 2007 provision is approximately
$14 million for a warranty-related issue surrounding a
product, built during a
15-month
period in 2004 and 2005, that is no longer in production.
Contained within the 2008 provision is approximately $23.5 for a
warranty-related issue associated with the companys
transmission product sold in Europe, limited to mid-2007 through
May 2008 production.
The product warranty liability is classified in the consolidated
balance sheets as follows:
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
|
Accounts payable and accrued expenses
|
|
$
|
51.4
|
|
|
$
|
34.7
|
|
Other non-current liabilities
|
|
|
30.7
|
|
|
|
35.4
|
|
|
|
|
|
|
|
|
|
|
Total product warranty liability
|
|
$
|
82.1
|
|
|
$
|
70.1
|
|
|
|
|
|
|
|
|
|
|
64
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 9
|
NOTES PAYABLE
AND LONG-TERM DEBT
|
Following is a summary of notes payable and long-term debt. The
weighted average interest rate on all borrowings outstanding as
of December 31, 2008 and 2007 was 5.0% and 5.4%,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
millions of dollars
|
|
2008
|
|
|
2007
|
|
December 31,
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
Bank borrowings and other
|
|
$
|
130.7
|
|
|
$
|
1.0
|
|
|
$
|
30.0
|
|
|
$
|
6.0
|
|
Term loans due through 2015 (at an average rate of 4.9% in 2008
and 4.0% in 2007)
|
|
|
53.1
|
|
|
|
12.9
|
|
|
|
33.7
|
|
|
|
18.8
|
|
6.50% Senior Notes due 02/17/09, net of unamortized
discount(a)
|
|
|
136.7
|
|
|
|
|
|
|
|
|
|
|
|
136.5
|
|
5.75% Senior Notes due 11/01/16, net of unamortized
discount(a)
|
|
|
|
|
|
|
149.2
|
|
|
|
|
|
|
|
149.1
|
|
8.00% Senior Notes due 10/01/19, net of unamortized
discount(a)
|
|
|
|
|
|
|
133.9
|
|
|
|
|
|
|
|
133.9
|
|
7.125% Senior Notes due 02/15/29, net of unamortized
discount
|
|
|
|
|
|
|
119.2
|
|
|
|
|
|
|
|
119.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of notes payable and long-term debt
|
|
|
320.5
|
|
|
|
416.2
|
|
|
|
63.7
|
|
|
|
563.5
|
|
Impact of derivatives on debt
|
|
|
0.2
|
|
|
|
43.4
|
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and long-term debt
|
|
$
|
320.7
|
|
|
$
|
459.6
|
|
|
$
|
63.7
|
|
|
$
|
572.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company entered into several interest rate swaps, which have
the effect of converting $325.0 million of these fixed rate
notes to variable rates as of December 31, 2008 and
December 31, 2007. The weighted average effective interest
rates for these borrowings, including the effects of outstanding
swaps as noted in Note 11, were 5.3% and 5.0% as of
December 31, 2008 and 2007, respectively. |
Annual principal payments required as of December 31, 2008
are as follows (in millions of dollars):
|
|
|
|
|
2009
|
|
$
|
320.7
|
|
2010
|
|
|
5.1
|
|
2011
|
|
|
3.0
|
|
2012
|
|
|
2.2
|
|
2013
|
|
|
2.2
|
|
After 2013
|
|
|
449.5
|
|
|
|
|
|
|
Total Payments
|
|
$
|
782.7
|
|
Less: Unamortized Discounts
|
|
|
(2.4
|
)
|
|
|
|
|
|
Total
|
|
$
|
780.3
|
|
|
|
|
|
|
The Companys long-term debt includes various financial
covenants, none of which are expected to restrict future
operations.
The Company has a multi-currency revolving credit facility,
which provides for borrowings up to $600 million through
July 22, 2009. At December 31, 2008 and
December 31, 2007 there were no outstanding borrowings
under the facility. The credit agreement is subject to the usual
terms and conditions applied by banks to an investment grade
company. The two key covenants of the credit agreement are a net
worth test and a debt compared to EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization) test. The
Company was in compliance with all covenants at
December 31, 2008. At December 31, 2008 and 2007, the
Company had
65
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding letters of credit of $21.4 million and
$22.0 million, respectively. The letters of credit
typically act as a guarantee of payment to certain third parties
in accordance with specified terms and conditions.
As of December 31, 2008 and 2007, the estimated fair values
of the Companys senior unsecured notes totaled
$532.3 million and $572.4 million, respectively. The
estimated fair values were $6.7 million lower in 2008 and
$33.7 million higher in 2007 than their respective carrying
values. Fair market values are developed by the use of estimates
obtained from brokers and other appropriate valuation techniques
based on information available as of year-end. The fair value
estimates do not necessarily reflect the values the Company
could realize in the current markets.
|
|
NOTE 10
|
FAIR
VALUE MEASUREMENTS
|
On January 1, 2008, the Company partially adopted as
required, Statement of Financial Accounting Standards
No. 157 Fair Value Measurements
(SFAS 157) which expands the disclosure of fair
value measurements and its impact on the Companys
financial statements. In February 2008, the FASB issued
FSP 157-2,
which delayed the effective date of adoption with respect to
certain non-financial assets and liabilities until 2009. We
intend to defer the adoption of SFAS 157 with respect to
certain non-financial assets and liabilities as permitted.
Statement No. 157 emphasizes that fair value is a
market-based measurement, not an entity specific measurement.
Therefore, a fair value measurement should be determined based
on assumptions that market participants would use in pricing an
asset or liability. As a basis for considering market
participant assumptions in fair value measurements,
SFAS 157 establishes a fair value hierarchy, which
prioritizes the inputs used in measuring fair values as follows:
|
|
|
Level 1:
|
|
Observable inputs such as quoted prices in active markets;
|
Level 2:
|
|
Inputs, other than quoted prices in active markets, that are
observable either directly or indirectly; and
|
Level 3:
|
|
Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
|
Assets and liabilities measured at fair value are based on one
or more of the following three valuation techniques noted in
SFAS 157:
|
|
|
|
A.
|
Market approach: Prices and other relevant information generated
by market transactions involving identical or comparable assets
or liabilities.
|
|
|
B.
|
Cost approach: Amount that would be required to replace the
service capacity of an asset (replacement cost).
|
|
|
|
|
C.
|
Income approach: Techniques to convert future amounts to a
single present amount based upon market expectations (including
present value techniques, option-pricing and excess earnings
models).
|
66
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table classifies the assets and liabilities
measured at fair value on a recurring and non-recurring basis as
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Balance at
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
December 31,
|
|
|
Identical Items
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Valuation
|
|
(millions)
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Technique
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
174.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
174.2
|
|
|
|
C
|
|